Understanding Occupational Fraud and Its Motivation

We’ve all heard stories of executives embezzling client money, employees selling intellectual data, and even management accepting bribes from contractors and vendors.  These are all forms of occupational fraud and they could easily become a very costly problem if you have not taken the necessary steps to protect your business.

Occupational fraud affects businesses around the world and can cause huge losses in revenues.  Small businesses and mid-sized enterprises are particularly vulnerable to occupational fraud, often due to a lack of anti-fraud controls, high employee turnover and ineffective employee monitoring mechanisms.

“The majority of Small Businesses and Mid-Sized Enterprises are not prepared to respond to occupational fraud, and more than half do not undertake period assessments of risks of fraud.” – CGA Canada

In honour of Fraud Prevention Month this March, I will be sharing some strategies that will help reduce your risks, beginning with defining occupational fraud, identifying fraud motivations and describing strategies to reduce your risk.

What is Occupational Fraud?

According to the Association of Certified Fraud Examiners, occupational fraud is defined as the use of one’s occupation for personal enrichment through the deliberate misuse or misappropriation of the employing organization’s resources or assets. 

“A large portion of [organizations] believe the risk of occupational fraud is low; however, 1 in 4… experienced incidents of occupational fraud in the last fiscal year.” – CGA Canada

What are the Most Common Types of Occupational Fraud?

There are three main classifications of occupational fraud: asset misappropriations, corruption, and fraudulent statements. 

Asset misappropriations are the most common type, however, they are typically the least costly.  This type of fraud involves the theft or misuse of an organization’s assets.

Corruption schemes are the second most common type of occupational fraud, and include schemes such as an employee using his or her influence in a business or official transaction to obtain an unauthorized benefit.  This type of fraud includes accepting bribes or illegal payments, gratuities or engaging in conflicts of interests.

Fraudulent statements, while the least common type of occupational fraud, can have the greatest financial impact on an organization. This type of fraud involves deliberate misstatement or falsification of an organization’s financial or non-financial statements.  Recording fictitious sales, concealing expenses or falsifying employment credentials are common examples of fraudulent statements.

What Motives Lead to Occupational Fraud?

Understanding the motives behind occupational fraud can help you assess your business and identify potential risks.  While those employees who typically commit occupational fraud are usually first-time offenders, common motivations include:

•       High debt load
•       Financial problems
•       Personal problems including addictions
•       Physical isolation in the workplace
•       Negative employee-employer relationship
•       Loss of status or a need to elevate status 

These common motivations, combined with opportunities such as working in isolation, sole responsibility over accounting, or even simply lacking regular assessments or audits, can all contribute to higher risk of occupational fraud.

Occupational Fraud Prevention Strategies

Employee monitoring mechanisms are a simple, yet effective way to limit the opportunity for occupational fraud.  A controlled access system for example, can limit employee access to key business assets, including valuable equipment and inventory, while also keeping track of employee activity.  

In addition, I recommend a quality surveillance system that is monitored 24/7 that can act as a deterrent to fraudulent behaviour, as it helps reduce opportunities to commit fraud in isolation.

In the second part of this blog “Protect Your Business From Occupational Fraud | Part 2,” I will discuss effective strategies for fraud prevention in more detail. 

Sources: 
Certified General Accountants Association of Canada (CGA Canada)
Association of Certified Fraud Examiners: 2014 Global Fraud Study

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