Fraud, embezzlement, corruption, theft of organizational assets, asset misappropriations, financial statement fraud and corruption schemes

1. So Who’s Committing
Fraud in Your
Organization?
Richard M. Potocek
CPA, MBA, CFE
January 9, 2013

2. So Who’s Committing Fraud in
Your Organization?
The Association of Certified Fraud
Examiners 2012 Report to the Nation
 According to the report, theft of
organizational assets, corruption/bribery
and financial statement fraud worldwide
cost companies an average of 5% of
gross revenues each year.
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3. Occupational Fraud and Abuse Classification System
©2012 Association of Certified Fraud Examiners, Inc. 3

4. Distribution of How Fraud is Committed
Occupational Frauds by Category — Frequency
©2012 Association of Certified Fraud Examiners, Inc. 4

5. Losses Associated with Internal Fraud
The median loss for all cases reported in the 2011 - 2012 reporting period
was $140,000. However, more than 20% of these cases involved losses of
at least $1 million.
 Asset Misappropriations were by far the most frequent fraud schemes
reported to the ACFE, accounting for more than 86% of cases, yet these
schemes also caused the lowest median loss at $120,000.
 Financial Statement Fraud was involved in less than 8% of the cases
studied, but caused the greatest median loss at $1 million.
 Corruption Schemes fell in the middle in terms of both frequency
(approximately one-third of the cases reported) and median loss
($250,000).
These loss figures do not include the costs in time and money spent to
investigate each case, or the damage to organizational reputation in high
profile cases.
©2012 Association of Certified Fraud Examiners, Inc. 5

6. So Who’s Committing Fraud in
Your Organization?
Who Commits Fraud?
 In two-thirds of the fraud schemes, the
perpetrator acted alone.
 A majority - 55 percent - attended college
or graduated from college.
 Approximately 14 percent obtained a
postgraduate degree. The median loss
increases from $100,000 for employees
with a high school diploma to $300,000 for
employees who obtained a postgraduate
degree.
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7. So Who’s Committing Fraud in
Your Organization?
Who Commits Fraud? (cont.)
 They are likely to be male, aged 31-45.
Males are 33 percent more likely to commit
fraud than their female colleagues.
 At the employee level, the amount of fraud
committed is pretty much 50/50 between
males and females. However, as you move
up the level of authority in an
organization, men start pulling away.
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8. So Who’s Committing Fraud in
Your Organization?
Who Commits Fraud? (cont.)
 At the manager/senior executive level, men are
approximately 25 percent more likely to commit
fraud.
 At the owner/top executive level, men are
approximately 40 percent more likely than
females to commit fraud.
 The median loss associated with males -
$232,000 - was more than double the median
loss associated with females at $100,000.
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9. So Who’s Committing Fraud in
Your Organization?
Who Commits Fraud? (cont.)
 More than half of the employees who
committed fraud had more than five years'
experience with their organizations.
 The median loss increases as the number of
years with an employer increases. The
median loss for employees with less than
one year of tenure was $47,000 and rose to
$289,000 for employees with 10 or more
years of tenure.
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10. So Who’s Committing Fraud in
Your Organization?
Who Commits Fraud? (cont.)
An employee who commits fraud usually works
in one of the following departments:
 Accounting  Customer Service
 Operations  Purchasing
 Sales  Upper Management
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11. So Who’s Committing Fraud in
Your Organization?
Who Commits Fraud? (cont.)
These six departments accounted for 80
percent of the cases examined in the report.
Most, 22 percent, were employed in the
accounting department where they had easier
access to records and documents to conceal
or perpetrate a fraud and over-ride internal
controls.
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12. So Who’s Committing Fraud in
Your Organization?
Who Commits Fraud? (cont.)
My Personal Experience:
Accounts Payable Clerk– Usually a modestly
compensated employee whose only job is to cut
checks to pay the organization’s bills that have
been approved for payment. Without significant
internal controls, it is easy to generate a fake bill
from a fictitious vendor (a friend/relative), forge
approval initials and cut the check.
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13. So Who’s Committing Fraud in
Your Organization?
Who Commits Fraud? (cont.)
The presence of the following
characteristics does not, in and of itself,
signify that an employee is committing
fraud or will in the future. These are just
the common traits and characteristics of
the average fraud perpetrator identified in
the Association of Certified Fraud
Examiners annual report.
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14. So Who’s Committing Fraud in
Your Organization?
Motivations to Commit Fraud
 Divorce or other expensive family issues
 Drug/gambling/sex/shopping addictions
 Legal and tax problems
 Strong feelings (usually verbalized to
coworkers) about inadequate pay or being
passed over for promotions ─ the “I deserve
more” rationalization
 Challenge – “I’m smarter than they are.”
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15. So Who’s Committing Fraud in
Your Organization?
Characteristics of an Employee Already
Involved in a Fraud Scheme
 Unusually close relationship with a vendor or customer
– “kick-back scheme”
 Defensiveness, irritability and suspiciousness – often
the reaction from a management level employee
 Refusal to take vacations or sick days – need to be
present to cover up the fraud
 No interest in seeking promotions out of current
department
 Volunteering to take all phone calls for the department
or handle all customer complaints
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16. So Who’s Committing Fraud in
Your Organization?
Who Commits Fraud? (cont.)
 An overwhelming number of employees
who commit fraud - 93 percent - have no
prior criminal record or history of a fraud-
related offense. This doesn’t mean they
haven’t done it before. …
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17. So Who’s Committing Fraud in
Your Organization?
Who Commits Fraud? (cont.)
 The reason so few fraud perpetrators are prosecuted
is because many employers are too embarrassed to
prosecute employees or don't want the publicity of the
arrest of an employee who handled money or had
access to someone's personal information.
 Many employers believe that the personal and
business costs of prosecution are not worth the
benefits received or money recovered. In many
incidences, the employer recovers only a small portion
of the amount stolen.
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18. So Who’s Committing Fraud in
Your Organization?
Who Commits Fraud? (cont.)
 Secrecy is especially true in the
nonprofit sector, in which organizations
are dependent on pledges or
contributions from the public. Think of
the impact on contributions if the
donating public discovered that a
portion of their contributions had been
stolen.
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19. So Who’s Committing Fraud in
Your Organization?
My Personal Recommendations
 If management chooses not to report to
law enforcement, or even it does, file a
lawsuit against the employee to put future
employers (who do pre-employment
background investigations) on notice
 “Deterrent Effect” - If no action is taken
against the employee, what message does
that send to others in the organization?
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20. So Who’s Committing Fraud in
Your Organization?
My Personal Recommendations
 Always conduct a “quality” pre-employment or
executive due diligence investigation for all
new hires. In addition to identifying applicants
with issues, it is a deterrent to those with
“baggage” from applying in the first place.
 Executive management should not get a pass.
A due diligence investigation should be
conducted to confirm
credentials, education, degrees
earned, experience, etc.
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21. So Who’s Committing Fraud in
Your Organization?
My Personal Recommendations
 Consider conducting employment re-
investigation every three to five years. The
“perfect” new employee at day one may
have a bankruptcy, tax and other
liens, multiple DUIs, lawsuits, a
foreclosure, a conviction, etc.
 Negative results may not be grounds for
termination, but might be a reason to re-
assess the employee’s role in the company.
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22. So Who’s Committing Fraud in
Your Organization?
Detection of Fraud Schemes
©2012 Association of Certified Fraud Examiners, Inc.
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23. So Who’s Committing Fraud in
Your Organization?
My Personal Recommendations
50.9% of internal frauds are discovered by a “tip” from
another employee.
 Provide employees with a way to report concerns of
fraud, unethical practices, safety, etc. to management
anonymously:
– Subscribe to a “Hot Line” telephone service or provide
an anonymous email address. Employees can then
report their concerns without worrying about
retribution from coworkers, supervisors or
management.
– Consider putting the Hot Line # on the website for
vendors, customers and others to use.
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24. 4550 Montgomery Avenue, Suite 650N • Bethesda, MD 20814
Questions & Answers
Rick Potocek, Forensic
Accounting and Dispute
Services Principal
Email: rick.potocek@grfcpa.com
Telephone: (301) 951 – 9090
Website: www.grfcpa.com