The Profile of an Occupational Fraud
What is occupational fraud?
Occupational fraud, or employee fraud, is fraud committed by an employee on an employer. Frauds committed by employees are more common and cause more financial loss than other types of fraud. Due to the continuing employment relationship, these frauds are usually meant to stay hidden.
ACFE Report on Occupational Fraud
The Association of Certified Fraud Examiners (ACFE) conducts surveys of its members every two years about current occupational fraud trends. Originally the surveys were undertaken mainly in the United States, as most members were located there. As the association has expanded throughout the world, the information gathered through the survey has become more global.
The 2002 report covered information from 663 direct occupational fraud cases, involving $7 billion in losses globally and information and statistics from thousands of other fraud investigations conducted by members. The 2004 report was formulated from information from 508 cases, with $761 million in losses.
The 2006 report covered information from 1134 occupational fraud cases, with just under 25% having losses over $1,000,000 and 9 cased having reported losses over $1 billion.
A summary of the findings
The 2006 Report summarizes the finding as:
(i) The study covered 1134 cases of occupational fraud.
(ii) Organizations suffer tremendous costs as a result of occupational fraud.
(iii) The data strongly supports the US requirement for audit committees to establish confidential procedures to report frauds.
(iv) Having confidential reporting procedures available reduce fraud losses significantly.
(v) The data suggests that confidential reporting procedures should include third-parties, such as customers and vendors.
(vi) Small businesses suffer disproportionately large losses due to occupational fraud and abuse.
(vii) The size of the loss caused is directly related to the position of the perpetrator.
(viii) The most cost-effective way to deal with fraud is to prevent it.
Background
There are three recognized factors required for an employee to commit a fraud against their employer. These are:
1. An opportunity to commit the fraud
2. A perceived need
3. A belief that they will not be caught
Reducing the opportunity to commit a fraud is a major prevention technique. A number of actions can be done to limit opportunity and these are detailed in other fact sheets and Fraud Awareness papers. Simply, if an employee is stopped from committing a fraud by internal controls, the fraud will either not be committed, or should be easily detected.
The need to commit a fraud is either a monetary one, usually financial pressure caused by some external factor; or a psychological one, possibly wanting to get back at the employer. These are factors personal to the individual fraudster and can be difficult to recognize and control by the employer.
The belief that they will not get caught is generally essential. Not many people will commit a fraud believing that they will get caught. Fraud prevention techniques should include factors that create a "perception of detection", or a belief that they will be caught and prosecuted.
Types of Frauds and Victims
What are the most common Occupation Frauds?
The surveys noted the main areas attacked by fraudsters and the most and least common types of occupational fraud. These have not changed over the years. There are three major types of occupational fraudsters, and the percentage breakdown between these three areas has remained fairly constant over time.
The major targets of fraud are the assets of the company, being involved in over 90% of all frauds investigated. But, the median loss from asset misappropriation is small in comparison to other two targets.
* Note that the percentage figures total more than 100%, as some schemes involve more than one of these areas of fraud.
| Asset Misappropriation | Corruption | Fraudulent Statements Fraud | |
|---|---|---|---|
| Percentage 1996 | 81% | 15% | 4% |
| Median Loss 1996 | $65,000 | $440,000 | $4,000,000 |
| Percentage 2002 | 85% | 12% | 5% |
| Median Loss 2002 | $80,000 | $530,000 | $4,250,000 |
| Percentage 2004 | 92.7% | 30.1% | 7.9% |
| Median Loss 2004 | $93,000 | $250,000 | $1,000,000 |
| Percentage 2006 | 91.5% | 30.8% | 10.6% |
| Median Loss 2006 | $150,000 | $538,000 | $2,000,000 |
Asset misappropriation is still the most common fraud, albeit with a smaller median loss. These can be broken down further into:
Cash Frauds; and
Asset (other than cash) Misappropriation.
Cash frauds make up about 90% of all misappropriation frauds, but again, at a smaller median loss.
* Note that the percentage figures total more than 100%, as some schemes involve more than one of these areas of fraud.
| Percentage 2002 | Median Loss 2002 | Percentage 2004 | Median Loss 2004 | Percentage 2006 | Median Loss 2006 | |
|---|---|---|---|---|---|---|
| Cash Frauds | 90% | $80,000 | 93.4% | $80,000 | 87.7% | $150,000 |
| Asset Misappropriation | 10% | $200,000 | 22.1% | $200,000 | 23.4% | $200,000 |
Cash is the more common target as it is generally easier to steal, transport or transfer, and is easier to convert to a usable form. A number of these frauds involved smaller amounts of money (in comparison), as a lot of businesses do not tend to keep large amounts of cash in-house.
Asset misappropriations, albeit less common, have the higher median loss. That is usually because cash, although more common, is usually found in lesser amounts and higher value assets may be a more attractive target and not be covered by as many internal controls.
Victims of Occupational Fraud
The Report provides some information on the types of businesses that were victims of occupational frauds. The highs and lows are as follows:
| Cases | Median Loss | |||
|---|---|---|---|---|
| Highs | Banking & Finance | 14.3% | Mining | $17,000,000 |
| Lows | Mining | 0.01% | Agriculture | $71,000 |
The Report contains a range of statistics about which industry is more susceptible to which fraud, and the individual losses. This information is too voluminous to reproduce here, but can be found in the actual report (link to this page).
Profiling the Fraudster
Profile by Position within the Organization
The survey found that the median dollar loss increased as the perpetrator's position within the employer business increased. This is usually explained on the basis that more senior people have a greater opportunity they have to commit and hide frauds. This is a common theme that is indicated throughout the remainder of the profiles.
The study also found that lower level employees committed more frauds in number than the management level, and about twice as many frauds as executives. This breakdown remained consistent for some time, but there is a swing to Management level having an increased involvement in the number of frauds. It would be interesting to consider a "per person" rate to determine what percentage of people within each employee group that commit fraud.
* Note that the percentage figures total more than 100%, as some schemes involve more than one of these levels.
| Percentage 2002 | Median Loss 2002 | Percentage 2004 | Median Loss 2004 | Percentage 2006 | Median Loss 2006 | |
|---|---|---|---|---|---|---|
| Employee | 65% | $70,000 | 67% | $62,000 | 41.2% | $78,000 |
| Management | 30% | $250,000 | 34% | $140,000 | 39.5% | $218,000 |
| Owner/Executive | 12% | $1,000,000+ | 12% | $900,000 | 19.3% | $1,000,000 |
Profile by Gender
Over the past surveys, the rate of fraud between the genders began to equalize in number. This was superficially explained by the trend of women getting closer to equality in the work place (in numbers and positions) and, as a result, getting the same opportunities to commit frauds that were historically predominately mainly open to men. This theory is easier to believe than females are becoming more dishonest. This position also appears to be changing with the number of frauds committed by men being twice the amount committed by women.
The survey shows that females have a lower median loss than men. This may be a hangover of the non-equity still residing in the work force. Interestingly the percentage of fraudsters in each gender has remained constant, with only a decrease in the median loss for males.
| Percentage 2002 | Median Loss 2002 | Percentage 2004 | Median Loss 2004 | Percentage 2004 | Median Loss 2006 | |
|---|---|---|---|---|---|---|
| Male | 53% | $200,000 | 53% | $160,000 | 61% | $250,000 |
| Female | 47% | $60,000 | 47% | $60,000 | 39% | $102,000 |
Profile by Age
The breakdown shows that median losses increases with the age of employees. This could again be superficially explained as the rise of the person within an organization as they get older and, therefore, giving them a greater opportunity to commit larger frauds. It could also be explained as a more mature mind only taking risks for larger benefits.
The propensity to commit fraud appears to peak in the 30 to 40 and the 40 to 50 year age brackets. The "per person" rate (comparing the frauds with the numbers of employees in each age bracket) would be interesting to see any correlation. It is likely that the number of people under 25 in the work force would be smaller than the number of people between the 30 and 50 years age brackets. Not enough information is available to draw any conclusions on the reasons.
| Percentage 2002 | Median Loss 2002 | Percentage 2004 | Median Loss 2004 | Percentage 2006 | Median Loss 2006 | |
|---|---|---|---|---|---|---|
| Under 25 | 6% | $18,000 | 5.9% | $18,000 | 6.1% | $25,000 |
| 26 to 30 | 10.5% | $27,000 | 10.7% | $25,000 | 8.8% | $50,000 |
| 31 to 40 | 36.5% | $100,000 | 34.2% | $77,500 | 32.5% | $135,000 |
| 41 to 50 | 30% | $200,000 | 32% | $173,000 | 34.6% | $250,000 |
| 51 to 60 | 14.5% | $285,000 | 15.1% | $250,000 | 15.3% | $350,000 |
| over 60 | 2.5% | $500,000 | 2% | $527,000 | 2.8% | $713,000 |
Profile by Marriage status
These are interesting figures, but no conclusion (except that most people over 30 are married) can be made from the statistics. No new statistics were generated in the 2004 or 2006 study.
| Percentage 2002 | Median Loss 2002 | |
|---|---|---|
| Married | 72% | $150,000 |
| Divorced | 8% | $80,000 |
| Single | 11% | $54,000 |
| Separated | 9% | $50,000 |
Profile by Education Standard
Generally there would be a correlation between a person's level of education and the position of that person holds within an organization, especially over time (as the person gets older and is promoted). As with some of the other profiling factors, there is a correlation between the size of the median loss and the level of education. Smarter people - smarter frauds?
The propensity to commit fraud seemed to correlate between the greater numbers of employees that would have a lower level of education and the number of frauds investigated, compared to the lesser number of employees with higher education and the lesser numbers of frauds. The High School figure also includes people that have had some post high school training or education, but have not finished degrees.
Interestingly the highest median loss from frauds committed changed from the last study, where the higher levels of management committed lesser (in amount) frauds. The 2006 trend now mirrors earlier studies where the higher position meant greater dollar value frauds.
| Percentage 2002 | Median Loss 2002 | Percentage 2004 | Median Loss 2004 | Percentage 2006 | Median Loss 2006 | |
|---|---|---|---|---|---|---|
| High School | 56.9% | $70,000 | 49.5% | $50,000 | 54.4% | $150,000 |
| University | 32.7% | $243,000 | 41.5% | $150,000 | 33.4% | $200,000 |
| Post Graduate | 10.4% | $162,500 | 9% | $325,000 | 12.2% | $425,000 |
Other Factors
The Effects of Collusion
60% of the frauds investigated were committed by a person acting in isolation. One of the difficulties in detecting a fraud by more than one person is that there are more people that can hide the fraud. The other side of that argument is that there are more people involved that may make a mistake, get cold feet, or simply confess implicating the other members.
In 2002, 67.6% of frauds investigated were committed by a person acting alone. That figure decreased slightly to 65.1% in the 2004 survey and again to 60.2% in 2006. Frauds committed by one person had a $67,000 median loss in 2002, decreasing to $58,500 in 2004, but rising to $100,000 in 2006. Where collusion was present, the median loss increased, as did the median time that the fraud continued undetected.
- 39.7% of frauds investigated in 2006 were committed by more than one person
- These frauds had a median loss of $485,000.
Past Criminal History
About 90% of people caught and convicted of occupational fraud had not previously been charged or convicted of a crime. This means that background checks may be of limited value when trying to find people that could commit fraud. Obviously background checks should still be used to find the 'repeat offenders'.
Detecting Occupational Fraud
All of the knowledge about who and how will not stop occupational fraud occurring. Most occupational fraud is detected through tips, and usually from other employees. The breakdown of detection methods is as follows:
| 2002 | 2004 | 2006 | |
|---|---|---|---|
| Tip | 43.0% | 39.6% | 34.2% |
| Internal Audit | 18.6% | 23.8% | 20.2% |
| By Accident | 18.8% | 21.3% | 25.4% |
| Internal Controls | 15.4% | 18.4% | 19.2% |
| External Audits | 11.5% | 10.9% | 12.0% |
| Notification by Police | 1.7% | 0.9% | 3.8% |
So who gives these tips that detect fraud? The greater majority are made by employees. Many businesses have set up procedures for employees to make tips and increased the detection of ongoing frauds and formed a strong deterrence factor.
| 2002 | 2004 | 2006 | |
|---|---|---|---|
| Employees | 61.1% | 59.6% | 64.1% |
| Customers | 20.1% | 19.7% | 10.7% |
| Vendors | 11.8% | 15.7% | 7.1% |
| Anonymous | 14.4% | 12.9% | 18.7% |
Is there a benefit in instigating anti-fraud measures in a business? There is no doubt that businesses that implement these measures still suffer from occupational fraud. But the study showed that the median losses suffered was significantly less than the losses suffered by businesses that did not have these measures.
| With Measure | Without Measure | |
|---|---|---|
| Internal Audits | $87,500 | $153,000 |
| External Audits | $100,000 | $140,000 |
| Hotlines | $77,500 | $150,000 |
Where is the greatest risk?
Greatest Risk of Dollar Losses by Fraud
Using these statistics, the type of person that will cause the greatest dollar loss through fraud (one that will commit the larger frauds) has the following profile:
(a) Male
(b) Executive Level
(c) Over 60
(d) Post Graduate degree
It is expected that the difference between males and females will be immaterial by the time the next survey is conducted. The profile highlights well educated mature professionals at executive level.
Greatest Risk of committing a Fraud (Propensity)
Using these statistics, the profile of the fraudster that is most likely to commit a fraud (regardless of the size) is as follows:
(a) Male
(b) Employee level
(c) Aged between 30 and 50
(d) High school education or less
The same comment can be made about the Male/Female relationship. This profile highlights a lower educated, lower level middle aged employee. These profiles should be considered in light of the comments regarding the "per capita" percentages that are not disclosed in the available figures.
Disclaimer
The enclosed information is of necessity a brief
overview and it is not intended that readers should rely
wholly on the information contained herein. No warranty
express or implied is given in respect of the information
provided and accordingly no responsibility is taken by
Worrells or any member of the firm for any loss resulting
from any error or omission contained within this
fact sheet.
Acknowledgment
The material in this Fact Sheet was sourced from various
publications including those listed in the Reading List on
the Fraud Awareness page on this website.
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Last Updated: 7.4.2008