Employing fraud prevention and fraud detection strategies is crucial to reducing loss. Every organization should have a plan in place as preventing fraud is much easier than recovering your losses after a fraud has been committed. Forensic accounting services can prevent these situations and uncover financial crimes.
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What is occupational fraud?
Occupational fraud is defined as “a deliberate misrepresentation of material facts with the specific intent to mislead another party, done for the purpose of deriving some personal or business benefit.”
Occupational fraud is a serious problem for businesses of all sizes, as it can drain resources and damage reputation. According to the Association of Certified Fraud Examiners, the typical organization loses 5% of its annual revenues to fraud. What’s more, small businesses are especially vulnerable to occupational fraud, as they often lack the internal controls necessary to prevent and detect it. Occupational fraudsters typically use one or more of three methods to commit their crimes: asset misappropriation, financial statement fraud, and corruption.
Asset misappropriation is the most common type of occupational fraud. It is the deliberate misuse of an organization’s funds or assets. It can take many forms, but all asset misappropriations have one thing in common: they involve the unauthorized use of company resources for personal gain.
Some of the most common examples include:
- Embezzlement: when someone unlawfully takes money or property that has been entrusted to them.
- Expense fraud: when someone submits false or inflated expenses to receive a higher reimbursement from their company.
- Payroll fraud: when someone manipulates their company’s payroll system to receive a higher salary than they are entitled to.
- Skimming: when someone steals cash before it has been recorded in the company’s books.
- False billing: when someone submits a false invoice to their company to receive payment for goods or services that were never provided.
While asset misappropriation can occur at any level within an organization, it is often perpetrated by employees who have access to the company’s finances. For instance, a bookkeeper may skim money from the cash register, or a purchasing manager may accept kickbacks from suppliers.
Asset misappropriation can have serious consequences for both businesses and employees. For businesses, asset misappropriation can lead to financial losses and damage to reputation. For employees, asset misappropriation can result in termination, criminal charges, and imprisonment.
Asset misappropriation can be difficult to detect, but there are a few red flags that may indicate that something is amiss. Here are some red flags to be aware of:
- Unexplained discrepancies in asset records or inventory levels
- Suspicious changes in vendor patterns or payment methods
- Lack of documentation for asset purchases or transfers
- Unauthorized use of company assets for personal gain
If you suspect the misappropriation of assets, it’s important to investigate the matter thoroughly. Working with a professional accountant or auditor can help you to get to the bottom of the issue and take appropriate action.
Financial Statement Fraud
Financial statement fraud is a type of accounting fraud that occurs when a company deliberately misrepresents its financial position. Financial statement fraud can take many different forms, but all involve deliberately misstating financial information to mislead investors, creditors, or other stakeholders.
Some common examples of financial statement fraud include:
- Overstating revenue
- Understating expenses
- Inflating asset values
- Recognizing fictitious revenue
While financial statement fraud is often perpetrated by senior executives to boost the stock price or meet financial targets, it can also be committed by lower-level employees who are trying to cover up their own illicit activity. Regardless of who commits financial statement fraud, it is always a serious crime that can have significant financial and legal consequences for both the individuals involved and the company itself.
It’s important to be aware of common red flags, such as:
- Unusually large profits: Companies engaging in financial statement fraud may show unusually large profits or revenue growth, smooth out earnings by reporting non-recurring items, or understate expenses.
- Inflated or hidden assets: Companies may use creative accounting methods to inflate assets or hide liabilities. For example, if a company’s financial statements show consistent and significant growth year after year, this may be cause for suspicion.
- Sudden expense drops: If a company’s expenses suddenly drop without a corresponding increase in revenue, this may also be indicative of fraud.
- Assets exceeding liabilities: Another red flag to watch out for is when a company’s assets begin to significantly exceed its liabilities. While this falsely inflates the true financial picture of the company, it can be difficult to catch unless you are closely scrutinizing the numbers. If financial statements don’t seem to add up, it’s important to investigate further.
- Other red flags include disproportionate levels of executive compensation, changes in accounting methods, and aggressive revenue recognition practices.
Corruption is the use of one’s position or power for personal gain. In the context of occupational fraud, corruption can take many forms, from bribery and kickbacks to nepotism and cronyism.
Corruption can involve financial transactions, such as embezzlement, or it can simply involve the misuse of one’s position for personal gain. For example, a public official who awards a contract to a friend or family member in exchange for a kickback would be guilty of corruption. Corruption often leads to more serious fraud, such as money laundering or insider trading, and can have far-reaching consequences for businesses of all sizes, costing them billions of dollars every year.
Corruption is a major problem in many organizations, and it is important for employers to be aware of the signs of corruption so that they can take steps to prevent it.
Some common signs of corruption in an occupational fraud context include:
- Employees who are living beyond their means
- Employees who are resistant to change
- Employees who have a history of financial problems
- Unexplained absences or late arrival to work (an employee may be engaging in illicit activities during work hours)
- Employees who are in positions of power or who have access to sensitive information may be more likely to commit corruption. For example, employees who are unusually close to vendors or suppliers may be engaging in corruption.
- Employees who frequently entertain clients or colleagues at expensive restaurants or hotels may be using company funds to pay for these activities
So, what can businesses do to prevent occupational fraud? While occupational fraud is a serious problem, there are steps that organizations can take that include developing a code of conduct, implementing effective controls, increasing transparency, and providing training on ethical behavior.
Create an internal system of accountability
One way to help prevent occupational fraud is to create an internal system of accountability. This could involve requiring employees to report any suspicious activity, establishing a hotline for reporting fraud, and conducting regular audits.
A great way to create an internal accountability system is to introduce a corporate-wide code of conduct.
A code of conduct provides clear guidelines for employees regarding what is expected of them and what is not acceptable behavior. It can also help:
- Deter potential fraudsters from targeting your business, as they will be aware that there are strict rules in place
- Make it easier to identify occupational fraud if it does occur, as it will provide a clear reference point for investigating any suspicious activity
- Create a culture of integrity within the organization
Internal controls are a set of procedures put in place by businesses to ensure the accuracy and validity of their financial statements. They help to prevent and detect errors, deter and investigate potential fraud, and protect the company’s assets. For example, regular financial audits can uncover any unusual or unexplained transactions. Additionally, clear communication from management about the importance of ethical behavior can help to create a culture of honesty and integrity.
Businesses should be proactive in working to prevent occupational fraud because it is more cost-effective to prevent fraud than to investigate and prosecute it after the fact. Proactive measures can help to deter would-be criminals, making it less likely that they will attempt to commit fraud in the first place. A proactive approach can also help businesses to identify potential red flags and take steps to address them before fraudulent activity has a chance to occur.
A fraud risk assessment is an important tool for businesses working to prevent occupational fraud. By identifying potential areas of fraud risk within the organization, businesses can develop targeted strategies for fraud prevention. Fraud risk assessments can be conducted internally or by an external party.
Fraud risk assessments can help business to:
- Identify potential problem areas before fraud occurs
- Develop comprehensive fraud prevention strategies
- Benchmark their performance against other organizations
- Build a culture of fraud prevention within their organization
How often should a fraud risk assessment be conducted?
Businesses should conduct regular audits when working to prevent occupational fraud. Audits can help to identify areas where fraud is more likely to occur. By taking a closer look at financial records and employee expense reports, businesses can quickly identify any red flags that may indicate fraudulent activity.
Audits can also help to deter fraud by sending a clear message that businesses are taking steps to prevent it. This can discourage employees from engaging in fraudulent behavior in the first place. Conducting regular audits can also help businesses to recover from any losses that have already been incurred because of fraud.
Fraud training for employees is an important part of protecting businesses from fraud and financial crimes. By teaching employees about the signs of fraud and how to spot suspicious activity, businesses can help to prevent fraud from occurring in the first place.
Fraud training can also help businesses to recover from fraud more quickly by giving employees the knowledge and tools they need to identify and report fraud.
Lead by example
Many organizations have implemented anti-fraud programs to reduce the incidence of occupational fraud. While these programs can be helpful, they are often not enough on their own.
One of the most effective ways to prevent fraud is by leading by example. When employees see senior leaders adhering to high standards of ethical behavior, they are more likely to do the same.
For example, if you require strict documentation and approval for all expenses, your employees are less likely to submit false expense reports. By creating a culture of ethical behavior, leaders can help to prevent occupational fraud before it occurs.
Given the high cost of occupational fraud, it’s essential that businesses take employee concerns seriously. In any organization, it is essential that employees feel like they can trust their leaders. After all, trust is the foundation of any healthy working relationship. By creating an open and trusting environment, employees will feel comfortable coming forward with information about potential fraud. Likewise, when employees feel that they can speak up without fear of retaliation, they are more likely to report suspected fraud.
While there is no surefire way to prevent occupational fraud, many companies have found that implementing strong internal controls and increasing employee awareness can go a long way toward mitigating the risk.
Rooled’s forensic accountants are uniquely positioned to detect and prevent occupational fraud. We have the skills and knowledge to identify irregularities and inconsistencies in financial records and can understand the various ways that occupational fraud can be perpetrated. In addition, our accountants are often able to provide valuable insights into your organization’s internal controls and procedures.
By working closely with occupational fraud prevention teams, we can help to identify weaknesses and vulnerabilities that could be exploited by fraudsters. In many cases, the presence of a forensic accountant can be enough to deter would-be fraudsters from attempting to commit occupational fraud. As such, Rooled can play a vital role in preventing this type of crime against your business.