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Illustration by Michael Waraksa

The Fraudster Down the Hall

​Employees are stealing from their own companies, and they are taking much more than just paper clips and Post-it Notes. Occupational fraud—sometimes called internal fraud—is globally costing businesses the equivalent of billions of dollars annually, according to a new global report.

The methods used by the culprits vary. Some skim cash from the reserves or walk away with inventory. Some alter numbers on payroll checks. And some pull off various embezzlement schemes, such as reporting false expenses or changing financial statements. The one commonality is that it is the organization's own employees who are perpetuating the misdeeds. Sometimes they act in collusion with each other, and sometimes they act alone. 

The findings come from Report to the Nations, an extensive study issued in April by the Association of Certified Fraud Examiners (ACFE). The study looked at 2,690 cases of fraud spanning 23 industries in 125 countries between January 2016 and October 2017. It is the tenth edition of the report, which ACFE issues every two years.

All told, the 2,690 cases of fraud resulted in losses that exceeded $7.1 billion. But the "true global cost of fraud is likely magnitudes higher," the report's authors write. ACFE estimates that 5 percent of worldwide business revenue is lost to fraud, which would come out to roughly $4 trillion annually.

"It's safe to say the problem remains huge," says John Warren, vice president and general counsel of ACFE and one of the authors of the report.

Given the magnitude of the losses, it's not surprising that another report, this one focused on the United Kingdom and issued last year by Bottomline Technologies, finds that executive concern about internal fraud spiked in just one year's time.

In the Bottomline report, UK Business Payments Barometer 2017, the percentage of study respondents who cited internal fraud as something they were concerned about jumped from 13 percent in 2016 to 31 percent in 2017, "a staggering 138 percent relative year-on-year increase," the authors write.

"There appear to be heightened levels of apprehension amongst financial decisionmakers," according to the report. "Equally as concerning is that almost 60 percent of financial decisionmakers simply did not know whether they had been impacted by [internal] fraud or not."

Occupational fraud, experts say, is an egalitarian crime; the culprit is just as likely to be a top executive as an obscure low-level employee.

"A fraudster doesn't look like a fraudster," Warren explains. "They look like everybody else. It legitimately could be anyone. It's not the person who looks sketchy. It could be the person who comes over to your house for dinner on the weekend."

When a fraudster is caught, coworkers are frequently shocked.

Historically, occupational fraud has been looked at as an accounting problem—numbers that don't add up tip off company leaders that something is wrong, Warren says. But ACFE's report shows otherwise.

"Part of our message is that it's not really an accounting problem, it's a behavior problem," Warren says.

In every edition of the report, ACFE has surveyed 17 different "red flag" behavioral indicators that tend to be associated with fraudsters. "What's fascinating is, every time we do the study, the same six rank highest," Warren says.

Those six red flag behavioral indicators are: living beyond one's means, financial difficulties, unusually close association with a vendor or customer, control issues and an unwillingness to share duties, divorce or other family problems, and a "wheeler-dealer" attitude or cultivated self-image. In at least 85 percent of the cases examined in the report, the fraudster displayed at least one of these red flags; in 50 percent of cases, he or she displayed multiple red flags.

Both male and female fraudsters exhibit these behavioral indicators, but often in different proportions, experts say.

"Studies in the past have shown that male perpetrators were more likely to be the wheeler-dealer-living-beyond-their-means type, whereas the women found themselves in some sort of financial distress and decided this was their easiest, or only, path for relief," says Shannon Walker, a fraud expert who is founder and CEO of WhistleBlower Security Inc.

ACFE's report bears out Walker's view. For female fraudsters, the most common red flag by far is financial difficulties; it occurs in 40 percent of cases, compared with only 24 percent of cases for males. And for males, the wheeler-dealer red flag was present in 16 percent of cases, compared with only 6 percent of cases for females.

"It does look like there are differences in the reasons why women steal, as opposed to men," Warren says. In addition, on average women commit smaller frauds than men do; losses tend to be 80 to 100 percent greater with men, he adds. 

Experts also say that security efforts to prevent occupational fraud can benefit from an understanding of the motivations and conditions underlying the crimes.

"Very few wake up in the morning and decide to rob their organization," Walker says. "Many have pressures to perform at work, pressures at home, or are suffering from various addictions that inform their decisionmaking processes."

Warren uses the "fraud triangle" model to explain the three conditions that are often present in occupational fraud incidents.

First, the employee is under financial pressure. Second, he or she is given an opportunity to commit fraud, such as access to company resources. Third, the employee rationalizes the theft to him or herself.

"They may think, 'I was borrowing it, I was going to pay it back,'" Warren says. Or, employees may feel the company owes them because they deserved a promotion and never received it. 

And if employees are on the verge of stealing, poor internal controls can help push them over the edge, Walker explains.

"Certainly, lack of controls or oversight contribute to the opportunity for those at risk to take that first step and steal," she says. "Once that wedge has been crossed, it becomes much easier for the fraudster to escalate."

In fact, the ACFE study found that nearly half of frauds examined in the report occurred because of internal control weaknesses.

For organizations that want to strengthen internal controls, Walker recommends maintaining consistent employee background checks before hiring; ensuring that sensitive duties are entrusted to more than one employee; implementing spot audit programs and conducting random audits on particularly vulnerable areas; and training employees about fraud prevention and the red flags they should be aware of.  

The other key to occupational fraud prevention lies in organizational culture, experts say.

Here, the tone is set at the top, Warren says. Organizational managers who always act ethically and treat all employees respectfully are leading by example; employees will often follow suit.

"But if leadership is pushing the boundaries, and wading into that ethical grey area, people will take cues from that," Warren says.

Walker agrees and says that some organizational leaders are taking steps to preempt bad situations by openly supporting a company code of conduct and ethics.

"Complacency and lack of a strong tone from the top are two of the most key indicators as to whether you are at risk," she says. "When management is seen as unengaged, unappreciative or apathetic, it creates an opportunity for a fraudster or potential fraudster to strike." ​