Fraud can happen anywhere, and it is growing. There are all kinds including: cheque fraud, security breaches at banks, and the big new one - Cyber fraud, but none of them are as big as Occupation Fraud.

Bi-annual survey

Every two years the ACFE (Association of Certified Fraud Examiners) publish their Report to the Nations on Occupational Fraud and Abuse. The 2012 report estimated that the typical firm looses 5% of their annual sales revenue to occupational fraud, and that there was some $3.5 trilliion occupational fraud world-wide. Other major findings from the survey which covered 1,388 examples in nearly 100 countries included:

• fraud reported had lasted a median of 18 months before being detected
• asset misappropriation schemes were by far the most common type of occupational fraud, comprising 87% of the cases reported to us; they were also the least costly form of fraud, with a median loss of $120,000. 
• occupational fraud is more likely to be detected by a tip than by any other method.
• corruption and billing schemes pose the greatest risks to organizations throughout the world. For all geographic regions, these two scheme types comprised more than 50% of the frauds reported to ACFE
• the presence of anti-fraud controls is notably correlated with significant decreases in the cost and duration of occupational fraud schemes.
• perpetrators with higher levels of authority tend to cause much larger losses
• the longer a perpetrator has worked for an organization, the higher fraud losses tend to be.
• the vast majority (77%) of all frauds in our study were committed by individuals working in one of six departments: accounting, operations, sales, executive/upper management, customer service and purchasing
• most occupational fraudsters are first-time offenders with clean employment histories.
• in 81% of cases, the fraudster displayed one or more behavioral red flags that are often associated with fraudulent conduct.
• nearly half of victim organizations do not recover any losses that they suffer due to fraud.

Main conclusions and recommendations

The main conclusions and recommendations in the 2012 report included:

• occupational fraud is truly universal
• providing individuals a means to report suspicious activity is a critical part of an anti-fraud program
• external audits should not be relied upon as an organization’s primary fraud detection method
• Targeted fraud awareness training for employees and managers is a critical component of a well rounded program for preventing and detecting fraud
• Most fraudsters exhibit behavioural traits that can serve as warning signs of their actions. These red flags — such as living beyond one’s means or exhibiting excessive control issues — generally will not be identified by traditional internal controls.

Fraud Prevention Checklist

The most cost-effective way to limit fraud losses is to prevent fraud from occurring. This checklist is designed to

help organizations test the effectiveness of their fraud prevention measures.

1. Is ongoing anti-fraud training provided to all employees of the organization?

• Do employees understand what constitutes fraud?
• Have the costs of fraud to the company and everyone in it — including lost profits, adverse publicity, job loss and decreased morale and productivity — been made clear to employees?
• Do employees know where to seek advice when faced with uncertain ethical decisions, and do they believe that they can speak freely?
• Has a policy of zero-tolerance for fraud been communicated to employees through words and actions?

2. Is an effective fraud reporting mechanism in place?

• Have employees been taught how to communicate concerns about known or potential wrongdoing?
• Is there an anonymous reporting channel available to employees, such as a third-party hotline?
• Do employees trust that they can report suspicious activity anonymously and/or confidentially and
• without fear of reprisal?
• Has it been made clear to employees that reports of suspicious activity will be promptly and thoroughly
• evaluated?
• Do reporting policies and mechanisms extend to vendors, customers and other outside parties?

3. To increase employees’ perception of detection, are the following proactive measures taken and publicized to employees?

• Is possible fraudulent conduct aggressively sought out, rather than dealt with passively?
• Does the organization send the message that it actively seeks out fraudulent conduct through fraud
• assessment questioning by auditors?
• Are surprise fraud audits performed in addition to regularly scheduled audits?
• Is continuous auditing software used to detect fraud and, if so, has the use of such software been made known throughout the organization?

4. Is the management climate/tone at the top one of honesty and integrity?

• Are employees surveyed to determine the extent to which they believe management acts with honesty
• and integrity?
• Are performance goals realistic?
• Have fraud prevention goals been incorporated into the performance measures against which
• managers are evaluated and which are used to determine performance-related compensation?
• Has the organization established, implemented and tested a process for oversight of fraud risks by the board of directors or others charged with governance (e.g., the audit committee)?
• 5. Are fraud risk assessments performed to proactively identify and mitigate the company’s vulnerabilities to internal and external fraud?

6. Are strong anti-fraud controls in place and operating effectively, including the following?

• Proper separation of duties
• Use of authorizations
• Physical safeguards
• Job rotations
• Mandatory vacations
• 7. Does the internal audit department, if one exists, have adequate resources and authority to operate effectively and without undue influence from senior management?

8. Does the hiring policy include the following (where permitted by law)?

• Past employment verification
• Criminal and civil background checks
• Credit checks
• Drug screening
• Education verification
• References check

9. Are employee support programs in place to assist employees struggling with addictions, mental/emotional health, family or financial problems?

10. Is an open-door policy in place that allows employees to speak freely about pressures, providingmanagement the opportunity to alleviate such pressures before they become acute?

11. Are anonymous surveys conducted to assess employee morale?

(Source & Copyright©2014 -  ACFE)