RSM Switzerland
Languages

Languages

Occupational Fraud

Occupational fraud is committed from within the organization. It is fraud committed against the organization by its own officers, directors, or employees – by the very people who were entrusted to protect the organization’s assets and resources.

There are three categories of occupational fraud: misappropriation of assets, corruption, and financial statement fraud. The most prevalent type of fraud is misappropriation of assets. This type of fraud includes: embezzlement by manipulating accounts or creating false invoices; payroll fraud by diverting payments or creating fictitious ghost employees; fraudulent expense claims by mischaracterizing expenses, overstating expenses, creating fictitious expenses or submitting multiple reimbursements; payment tampering by altering payee; data theft; intellectual property theft; cash larceny; etc.

In their most recent study of an analysis of 2,690 cases of occupational fraud, the ACFEs found that 89% of the cases contained an element of occupational fraud, with a median loss of $114,000. (1)

Fraud Triangle

Improved communication and awareness of fraud is the first critical step in combating occupational fraud. Equally important is the ongoing performance of a fraud risk assessment, which is a process aimed at proactively identifying and addressing an organization’s vulnerabilities to fraud. The Fraud Triangle is often used in this assessment, as it describes three elements that are present in every situation of fraud:

  1. Motive (or pressure) – the need for committing fraud. For example, the need for money to pay for a certain lifestyle or to solve money problems. Greed can also become a pressure, but it usually needs to be associated with injustice; for instance, “The company has not been paying me what I am really worth”.
  2. Rationalization – the mindset of the fraudster, which allows the person to justify the crime in a way that is acceptable to his or her internal moral compass.
  3. Opportunity – the situation that enables fraud to occur. An opportunity often presents itself when internal controls are weak or nonexistent.

 

Breaking the Fraud Triangle is the key to fraud deterrence, and it implies that an organization must remove one of the elements in the fraud triangle in order to reduce the likelihood of fraudulent activities. Of the three elements, removal of Opportunity is most directly affected by the system of internal controls and generally provides the most actionable route to deterrence of fraud.

Fraud Risk Landscape

The risks of fraud may only be increasing, as we see growing globalization, more competitive markets, rapid developments in technology and periods of economic difficulty. Despite the serious risk that fraud presents to business, many organizations still do not have formal systems and procedures in place to prevent, detect and respond to fraud. While no system is completely fool-proof, there are steps which can be taken to deter fraud and make it much less attractive to commit.

Fraud can be especially devastating to small businesses. These organizations typically have fewer resources to both prevent and recover from a fraud, and they often require an increased level of trust in employees due to a lower ability to implement robust anti-fraud controls.

Fraud risk management

An effective fraud risk management framework will enable organizations to have controls that first prevent the fraud from occurring, detect as soon as a fraud happens and respond effectively to fraud incidents when they occur. Evaluating anti-fraud programs, controls, ethical conduct and compliance with policies and procedures in the business process by assessing its vulnerability to fraud is the foundation on which effective anti-fraud processes are built.

Conclusion

Having a reputation for integrity is crucial to safeguarding market confidence and public trust. Unfortunately, fraud and misconduct can seriously undermine such efforts, exposing an organization to legal, regulatory, or reputational damage. For this reason, the need for a strong anti-fraud stance with a proactive and comprehensive approach to combating fraud is clear and should be a focus of every organization.

 

  1. Report to the Nations, 2018 Global Study on Occupation Fraud and Abuse

 

Jennifer Bendik

Find out how RSM Switzerland can help you

Services

Is Your Organization Susceptible to Fraud?

According to the latest data from the Association of Certified Fraud Examiners (ACFEs), organizations lose an estimated 5% of their annual revenues to fraud. In a competitive market, that could be your profit margin.

Occupational Fraud

Occupational fraud is committed from within the organization. It is fraud committed against the organization by its own officers, directors, or employees – by the very people who were entrusted to protect the organization’s assets and resources.

There are three categories of occupational fraud: misappropriation of assets, corruption, and financial statement fraud. The most prevalent type of fraud is misappropriation of assets. This type of fraud includes: embezzlement by manipulating accounts or creating false invoices; payroll fraud by diverting payments or creating fictitious ghost employees; fraudulent expense claims by mischaracterizing expenses, overstating expenses, creating fictitious expenses or submitting multiple reimbursements; payment tampering by altering payee; data theft; intellectual property theft; cash larceny; etc.

In their most recent study of an analysis of 2,690 cases of occupational fraud, the ACFEs found that 89% of the cases contained an element of occupational fraud, with a median loss of $114,000. (1)

Fraud Triangle

Improved communication and awareness of fraud is the first critical step in combating occupational fraud. Equally important is the ongoing performance of a fraud risk assessment, which is a process aimed at proactively identifying and addressing an organization’s vulnerabilities to fraud. The Fraud Triangle is often used in this assessment, as it describes three elements that are present in every situation of fraud:

  1. Motive (or pressure) – the need for committing fraud. For example, the need for money to pay for a certain lifestyle or to solve money problems. Greed can also become a pressure, but it usually needs to be associated with injustice; for instance, “The company has not been paying me what I am really worth”.
  2. Rationalization – the mindset of the fraudster, which allows the person to justify the crime in a way that is acceptable to his or her internal moral compass.
  3. Opportunity – the situation that enables fraud to occur. An opportunity often presents itself when internal controls are weak or nonexistent.

 

Breaking the Fraud Triangle is the key to fraud deterrence, and it implies that an organization must remove one of the elements in the fraud triangle in order to reduce the likelihood of fraudulent activities. Of the three elements, removal of Opportunity is most directly affected by the system of internal controls and generally provides the most actionable route to deterrence of fraud.

Fraud Risk Landscape

The risks of fraud may only be increasing, as we see growing globalization, more competitive markets, rapid developments in technology and periods of economic difficulty. Despite the serious risk that fraud presents to business, many organizations still do not have formal systems and procedures in place to prevent, detect and respond to fraud. While no system is completely fool-proof, there are steps which can be taken to deter fraud and make it much less attractive to commit.

Fraud can be especially devastating to small businesses. These organizations typically have fewer resources to both prevent and recover from a fraud, and they often require an increased level of trust in employees due to a lower ability to implement robust anti-fraud controls.

Fraud risk management

An effective fraud risk management framework will enable organizations to have controls that first prevent the fraud from occurring, detect as soon as a fraud happens and respond effectively to fraud incidents when they occur. Evaluating anti-fraud programs, controls, ethical conduct and compliance with policies and procedures in the business process by assessing its vulnerability to fraud is the foundation on which effective anti-fraud processes are built.

Conclusion

Having a reputation for integrity is crucial to safeguarding market confidence and public trust. Unfortunately, fraud and misconduct can seriously undermine such efforts, exposing an organization to legal, regulatory, or reputational damage. For this reason, the need for a strong anti-fraud stance with a proactive and comprehensive approach to combating fraud is clear and should be a focus of every organization.

 

  1. Report to the Nations, 2018 Global Study on Occupation Fraud and Abuse

 

Jennifer Bendik

Find out how we can help you with Fraud

Is Your Organization Susceptible to Fraud?