The Profile of an Occupational Fraud
What is occupational fraud?
Occupational fraud is fraud committed by an employee in the course of their employment on their employer. They are more common and cause more financial loss in total to businesses than other third party frauds. As employees will continue to work at the business, they will generally try to hide these frauds permanently, meaning that most occupational fraud will be committed over an extended period of time.
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 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.
The latest report, for 2008, covered 959 cases of occupational fraud with about one-fourth of the cases having losses in excess of US$1 million.
A summary of the findings
The 2008 Report summarizes the finding as:
(i) The study covered 959 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 as the most common way of uncovering fraud is by tips from employees.
(v) The data suggests that confidential reporting procedures should include third-parties, such as customers and vendors.
(vi) Small businesses are especially vulnerable to occupational fraud and abuse.
(vii) The size of the loss caused is directly related to the position of the perpetrator with frauds by upper management averaging almost US$900,000.
(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
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 frauds, 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.
| Asset Misappropriation | Corruption | Fraudulent Statements Fraud | |
|---|---|---|---|
| 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 |
| Percentage 2008 | 88.7% | 27.4% | 10.3% |
| Median Loss 2008 | $150,000 | $375,000 | $2,000,000 |
* Note that the percentage figures total more than 100%, as some schemes involve more than one of these areas of fraud.
Asset misappropriation is still the most common fraud by number, albeit with a smaller median loss than Corruption or Financial Statement Frauds. Asset misappropriation frauds can be broken down further into:
Cash Frauds; and
Other Asset Misappropriation.
Cash frauds make up about 90% of all misappropriation frauds, but again, at a smaller median loss. Other asset misappropriations, albeit less common, have the higher median loss. That is usually because higher value assets may be a more attractive target and not be covered by as many internal controls.
| Percentage 2004 | Median Loss 2004 | Percentage 2006 | Median Loss 2006 | Percentage 2008 | Median Loss 2008 | |
|---|---|---|---|---|---|---|
| Cash Frauds | 93.4% | $80,000 | 87.7% | $150,000 | 85% | not recorded |
| Other Asset Misappropriation | 22.1% | $200,000 | 23.4% | $200,000 | 16.3% | $100,000 |
* Note that the percentage figures total more than 100%, as some schemes involve more than one of these areas of fraud.
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.
Cash frauds may be dissected into frauds against cash receipts (e.g. skimming frauds), and against cash payments (e.g. billing and payroll frauds). From these figures and averages, the single best way to reduce fraud in any business is to ensure that there are adequate controls over the cash payments system.
| Cash Receipt Frauds | Cash Payment Frauds | |
|---|---|---|
| Percentage 2008 | 26.9% | 76.5% |
| Median Loss 2008 | $80,000 | up to $138,000 |
* Note that the percentage figures total more than 100%, as some schemes involve more than one of these areas of fraud.
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:
| Percentage of Cases | Median Loss | |||
|---|---|---|---|---|
| High | Banking & Finance | 14.6% | Telecommunications | $800,000 |
| Low | Agriculture & Forestry | 1.4% | Education | $58,000 |
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 - probably because there are many more lower level employees that executives. This breakdown remained consistent for some time, but there is a swing to Management level committing a greater 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.
| Percentage 2004 | Median Loss 2004 | Percentage 2006 | Median Loss 2006 | Percentage 2008 | Median Loss 2008 | |
|---|---|---|---|---|---|---|
| Employee | 67% | $62,000 | 41.2% | $78,000 | 39.7% | $70,000 |
| Management | 34% | $140,000 | 39.5% | $218,000 | 37.1% | $150,000 |
| Owner/Executive | 12% | $900,000 | 19.3% | $1,000,000 | 23.3% | $834,000 |
Profile by Job within Business
What type of frauds that can be committed and how easy they are to commit may depend on where the employee works within the business. Understandably the greatest number of cases are committed by people with the accounting area of the business, as these employees will have the knowledge of how to commit the fraud and access to the records to do so. The largest median losses were incurred by frauds committed by people within the legal department.
The lowest number of frauds are committed by employees in the internal audit department. Given that these people are charged with locating fraud, this is also understandable. Lowest median loss was incurred by people working in the customer service area, and this may be explained by a lack of opportunity to commit fraud.
| Cases | Median Loss | |||
|---|---|---|---|---|
| Highs | Accounting | 28.9% | Legal | $1,100,000 |
| Lows | Internal Audit | 0.8% | Customer Service | $45,000 |
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 50% more 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 2004 | Median Loss 2004 | Percentage 2004 | Median Loss 2006 | Percentage 2008 | Median Loss 2008 | |
|---|---|---|---|---|---|---|
| Male | 53% | $160,000 | 61% | $250,000 | 59.1% | $250,000 |
| Female | 47% | $60,000 | 39% | $102,000 | 40.9% | $110,000 |
Profile by Age
The breakdown shows that median losses increase 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 2004 | Median Loss 2004 | Percentage 2006 | Median Loss 2006 | Percentage 2008 | Median Loss 2008 | |
|---|---|---|---|---|---|---|
| Under 25 | 5.9% | $18,000 | 6.1% | $25,000 | 4.6% | $25,000 |
| 26 to 30 | 10.7% | $25,000 | 8.8% | $50,000 | 8.1% | $50,000 |
| 31 to 40 | 34.2% | $77,500 | 32.5% | $135,000 | 29% | $145,000 |
| 41 to 50 | 32% | $173,000 | 34.6% | $250,000 | 35.5% | $250,000 |
| 51 to 60 | 15.1% | $250,000 | 15.3% | $350,000 | 18.9% | $500,000 |
| over 60 | 2% | $527,000 | 2.8% | $713,000 | 3.9% | $435,000 |
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.
| Percentage 2004 | Median Loss 2004 | Percentage 2006 | Median Loss 2006 | Percentage 2008 | Median Loss 2008 | |
|---|---|---|---|---|---|---|
| High School | 49.5% | $50,000 | 54.4% | $150,000 | 54.7% | $150,000 |
| University | 41.5% | $150,000 | 33.4% | $200,000 | 34.4% | $210,000 |
| Post Graduate | 9% | $325,000 | 12.2% | $425,000 | 10.9% | $550,000 |
Other Factors
The Effects of Collusion
64% 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, 60.2% in 2006 and is now 63.9% in 2008. Frauds committed by one person had a $67,000 median loss in 2002, $58,500 in 2004, $100,000 in 2006 and $115,000 in 2008. Where collusion was present, the median loss increased, as did the median time that the fraud continued undetected.
- 36.1% of frauds investigated in 2008 were committed by more than one person
- These frauds had a median loss of $500,000.
Past Criminal History
About 90% of people caught and convicted of occupational fraud had not previously been charged or convicted of a crime, and over 80% have never been terminated from a job. 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. Interestingly, with all of the internal controls in place and the internal audit function looking for fraud, most occupational fraud is detected through tips from other employees. Most interestingly, more fraud is found by accident than by internal controls. The breakdown of detection methods is as follows:
| 2002 | 2004 | 2006 | 2008 | |
|---|---|---|---|---|
| Tip | 43.0% | 39.6% | 34.2% | 46.2% |
| Internal Audit | 18.6% | 23.8% | 20.2% | 19.4% |
| By Accident | 18.8% | 21.3% | 25.4% | 20.0% |
| Internal Controls | 15.4% | 18.4% | 19.2% | 23.3% |
| External Audits | 11.5% | 10.9% | 12.0% | 9.1% |
| Notification by Police | 1.7% | 0.9% | 3.8% | 3.2% |
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 | 2008 | |
|---|---|---|---|---|
| Employees | 61.1% | 59.6% | 64.1% | 57.7% |
| Customers | 20.1% | 19.7% | 10.7% | 17.6% |
| Vendors | 11.8% | 15.7% | 7.1% | 12.3% |
| Anonymous | 14.4% | 12.9% | 18.7% | 8.9% |
| Other | 10.2% |
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 2006 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
These profiles should be considered in light of the comments regarding the "per capita" percentages that are not disclosed in the available figures.
Red Flags
With perfect hindsight, business owners may have been able to identify some behavioural traits in employees that have been found committing fraud. These traits would have been on display during the period when the fraud was being committed, but not recognised or the link between them and a warning of possible fraud was not made.
There are a number of red flag behaviours but we have only listed the top six (as found in the recent study).
| Behavioural Red Flag | Percentage shown in 2008 cases |
|---|---|
| Living beyond ones means | 38.6% |
| Suffering financial difficulties | 34.1% |
| Wheeler-dealer attitude | 20.3% |
| Control issues, not willing to share duties | 18.7% |
| Divorce or family issues | 17.1% |
| Unusually close association with suppliers or customers | 15.2% |
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: 3.6.2009