Report: Smaller companies most at risk for occupational fraud

The report – based on 1,134 fraud cases reported to certified fraud examiners throughout the country from January 2004 to January 2006 – also found that 36 percent of companies victimized were businesses with fewer than 100 employees. The median loss among small businesses was $190,000.

A certified fraud examiner with BKD LLP said those findings should be of particular concern in southwest Missouri, which prides itself on the number of entrepreneurs and small family-owned businesses.

“It can and will happen if you don’t have the right steps in place,” said Jeff Roberts, a senior managing consultant in BKD’s forensics and dispute consulting division.

The first step is learning to identify occupational fraud, which is defined as the “use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets,” the report said.

The alleged embezzlement of an estimated $1.2 million from the Springfield Municipal Court may be the most recent and egregious instance of occupational fraud locally, but the public rarely catches wind of smaller thefts that happen frequently in the private sector.

Last year, former Saddlebrooke bookkeeper Larita J. Grand was arrested and charged with three counts of felony theft for allegedly stealing more than $23,000 from three companies associated with the master-planned community in rural Christian County. Grand, 52, was convicted on all counts, sentenced to five years of supervised probation and ordered to pay $30,371 in restitution to her former employer.

The Saddlebrooke theft is a textbook case of occupational fraud, in which a single person is trusted with a company’s finances.

‘Perception of detection’

For smaller businesses that can’t afford to hire an in-house auditor, there are a variety of training seminars on fraud prevention techniques, said Penny Clayton, a certified fraud examiner and accounting professor at Drury University.

In Springfield, U.S. Bank holds an annual seminar that trains businesspeople how to guard against internal and external fraud, said Assistant Vice President Lelia Voss. At this year’s seminar – held in September – participants raised concerns about protecting their assets when outsourcing work to contractors, Voss said.

But in most cases, the perpetrator lies within.

To combat this, business owners should make arrangements to receive company bank statements at home, review them for unusual checks or deposits and ask bookkeepers questions about inconsistencies, said BKD’s Roberts. The practice is known as “the perception of detection,” he said.

Nearly 90 percent of the cases reviewed for the ACFE report involved misappropriation of cash assets, although noncash misappropriation typically involved a higher loss – $200,000 versus $150,000.

Almost a third of the cases involved monetary losses between $100,000 and $499,999, and nearly a quarter of them exceeded the $1 million mark, according to the report. The median loss, however, was $159,000, and the median length of time a fraud scheme lasted before it was discovered was 18 months.

The majority of cases – 14 percent, or nearly 150 – occurred in the banking and financial services industry, where the median loss was $258,000. Other industries hit hard by occupational fraud include government, manufacturing and health care.

Aside from a single case involving a mining company defrauded out of $17 million, the wholesale trade industry suffered the highest median loss at $1 million. Construction contractors also experienced a high median loss at a staggering $500,000.

Sheryl Letterman, executive director of the Springfield Contractors Association, said she wasn’t aware of any significant fraud cases involving local construction companies but heard of other types of theft.

“You hear anecdotal stories about employees taking tools and keeping them or reselling them,” she said.

Hotline tips

The ACFE report also reiterated what experts know to be true: Occupational fraud is often uncovered by accident. In many cases, customer complaint or a question from a new employee sheds light on wrongdoing.

Despite the push for internal controls and external audits to deter and detect fraud, cases are most likely to be discovered by accident or through hotline tips, according to the report.

Hotlines have emerged as an effective way for hesitant underlings to anonymously report fraudulent activity by principals or executives, Roberts said.

“There are many frauds known by employees,” he said. “And when they don’t have a confidential way to report those frauds, they will keep their concerns to themselves. They figure it’s their boss … and they don’t want to get fired.”

Roberts said “quite a bit” of occupational fraud occurs in the middle to upper ranks of a company, where supervisors are able to override established protocol and intimidate subordinates.

Some employees choose not to report fraud because they view it as tattling on or betraying their employer, Drury’s Clayton added.

“Some people still have the perception that, if you blow the whistle, it’s not ethical – that somehow it just feels wrong when you’re telling on a peer,” she said.

Lessons Learned the Hard Way

Findings of the 2006 Report to the Nation on Occupational Fraud and Abuse released by the Association of Certified Fraud Examiners:

• Nearly a quarter of the cases reviewed for the report resulted in losses of at least $1 million.

• Frauds committed by company owners or executives resulted in a median loss of $1 million.

• More than 40 percent of frauds involving at least $1 million were detected with tips.

• Nearly two-thirds of companies victimized by occupational fraud conducted routine background checks on new employees, but less than 8 percent of the perpetrators had prior convictions.

• Companies with anonymous fraud hotlines suffered a median loss of $100,000 versus $200,000 for companies without a confidential reporting system.