Sleeping companies lose big from employee, executive fraud

Companies that fail to continually watch for employee and executive fraud typically lose 5 percent of revenues each year to insider cunning, which amounts to nearly $3.7 trillion globally, a report found.

The 2014 Global Fraud Study released this week by the Association of Certified Fraud Examiners (ACFE) pegged the median loss from fraud at $145,000. More than 1 in 5 of the almost 1,500 cases analyzed in more than 100 countries had employees walking away with at least $1 million.

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Employees most likely to rip-off companies are not who many managers would suspect. More than 80 percent of the fraudsters were first-time offenders who have worked at the company for years. Two-thirds are male.

"Your occupational fraudster generally doesn't come to work expecting to steal," John Warren, vice president and general counsel of the ACFE, said. "They usually do it because of some sort of circumstance that has put them in a position where they're desperate for money."

In 85 percent of the cases studied, employees got the money by what the study labeled as "asset misappropriation." That can include padding travel expenses, collecting paychecks for former employees or creating false invoices and having the money sent to the Post Office box of a fictitious company.

While the most prevalent, such fraud does not lead to the greatest individual losses. That rests with people at the executive level who doctor financial statements to make a company's earnings look better. Often called cooking the books, such scams resulted in a median loss of $1 million, the study found.

While owners and executives only accounted for 19 percent of all fraud, they caused a median loss of $500,000, the study found. The average employee committed 42 percent of the frauds but only caused a median loss of $75,000.

Employees working in accounting, operations, sales, executive or upper management, customer service, purchasing or finance committed more than three quarters of the fraud. In the majority of cases, organizations recovered none or only a fraction of the losses.

Conspirators tend to steal more than individuals. The median loss from schemes involving from two to more than four people ranged from $200,000 to more than $500,000.

Financial services, government and manufacturing had the greatest number of fraud cases in the study, with mining, real estate and the oil and gas industries reporting the largest median losses.

Smaller businesses, which typically have fewer anti-fraud controls, generally suffered higher losses than larger companies. The median loss among smaller organizations was $154,000.

The most common way fraudsters are uncovered is through tips. Someone fingering the fraudster is how more than 40 percent of the cases in the study were uncovered, which was more than twice the rate of any other method of detection, such as an internal audit. Fellow employees accounted for about half the number of tips.

Therefore, companies can significantly reduce losses by setting up a hotline and then educating employees on the kind of activity considered fraudulent to eliminate any grey areas.

Only about half of the companies in the study had hotlines.

"It's crazy," Warren said of the low percentage. "The data is clear that tips are the best way to catch fraud and hotlines aren't that expensive."

Another effective method in reducing fraud is data monitoring. Having computer systems in place that flag unusual transactions can reduce losses by 60 percent and increase detection by 50 percent, when compared to companies that don't use data monitoring, Warren said.

[Fraud prevention: Improving internal controls]

The key takeaway from the study is companies that keep a watchful eye will suffer fewer losses. Those who act only after being told by a supplier, law enforcement or some other third-party are likely to lose big.

"If you wait to hear about it, the money is out the door and you're going to have a lot bigger hit than you would have had if you were paying attention upfront," Warren said.

This story, "Sleeping companies lose big from employee, executive fraud" was originally published by CSO.

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