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            Mar
            24
            Minneapolis
            Employee Theft

            Who commits fraud? Know where to look by learning stats

            Our firm recently planned a seminar on occupational fraud and had hired a convicted embezzler to speak.

            After serving time in jail for taking over a million dollars from a manufacturing company in the 1990s, he traveled the country discussing fraud from an insider’s perspective.

            Just before the invitations were sent, we found out that he had again been charged with occupational fraud. Some people just can’t resist temptation.

            U.S. organizations lose an estimated 7 percent of revenue to occupational fraud, according to the 2008 Report to the Nation on Occupational Fraud & Abuse, published by the Association of Certified Fraud Examiners. Fraud by its nature is hidden, so the true amount of fraud losses cannot really be known.

            Based on the submitted cases, businesses with fewer than 100 employees show the largest losses, with a median loss of $200,000, compared to $147,000 for the largest companies and $175,000 overall. The median loss for private companies (39 percent of the cases submitted) was $278,000.

            Frauds in small businesses were much more likely than larger ones to be detected by tips or accident, indicating that these organizations do not do a good job of proactively detecting fraud.

            Fraud occurs when three elements are present:

            1. Pressure to commit the fraud, usually due to personal circumstances.

            2. Opportunity to commit fraud, usually due to lack of organizational controls.

            3. Ability to rationalize the fraud, usually due to a lack of morals or a feeling of entitlement.

            A typical ‘frauder’ is male, age 41 to 50, works in the accounting department or is a member of upper management. Longer-term employees tend to commit much larger frauds. They have the experience and authority to be able to work around any controls.

            Employees with lower salaries commit more frauds than those with salaries over $50,000 but higher salaried employees steal more. The education level of the ‘frauder’ is typically a high school graduate or someone with a bachelor’s degree.

            Perpetrators work alone 60 percent of the time, but when two or more work together, the losses increase more than four times. Only 7 percent of those caught had prior convictions. Frequently, employers do not want to prosecute, so perpetrators are not recognized as such, and thus continue to steal from their employers.

            How they steal

            Here are some ways employees can steal from small businesses, in order of frequency from the ACFE Report. The amounts shown are median losses (all cases reported).

            • Billing ($100,000). An employee submits invoices for payment of nonexistent goods or services. How it’s done: Employee creates a company that bills the employer for nonexistent goods or services or for products at inflated prices. An employee may also have the company pay for personal expenses through direct billing.
            • Check Tampering ($138,000). An employee forges or alters company checks or steals outgoing checks that were issued to a third party. How it’s done: An employee takes an issued check and erases the payee and replaces his or her name endorses a check and deposits it into a personal account or steals blank checks and writes them to himself or herself or an accomplice or for personal expenses.
            • Corruption ($375,000). Includes conflicts of interest, bribery, illegal gratuities and extortion. How it’s done:? Employee owns an undisclosed interest in a supplier and charges inflated prices employee accepts a kickback for providing competitive bid information or processing inflated invoices a contractor rewards the employee for negotiating a contract employee forces vendor to hire a relative before agreeing to that vendor.
            • Skimming ($80,000). An employee takes money from the company before it has been recorded on the books. How it’s done: A bartender or cashier accepts payment, pockets the money and doesn’t record the sale.
            • Expense reimbursements ($25,000). An employee makes a claim for reimbursement for fictitious or inflated business expenses. How it’s done: Employee submits receipts for personal travel or inflates actual expenses, such as mileage.
            • Cash on hand ($35,000). Employee steals cash kept on hand, for example from a company vault.
            • Cash larceny ($75,000). Cash is stolen after it has been recorded on the company’s books. How it’s done: Employee steals cash and checks from daily receipts before they can be deposited.
            • Non-cash ($100,000). An employee steals or misuses non-cash assets.?How it’s done:? An employee steals inventory from a warehouse or misuse confidential customer financial information.
            • Payroll ($49,000). An employee makes false claims for compensation. How it’s done: An employee claims overtime for hours that were never worked, or adds a fictional person to the payroll and has the check deposited into a personal account.
            • Financial statements ($2 million). Employee manipulates the reported financial statements through concealed liabilities, fictitious revenue,improper valuations,? improper disclosures or timing differences. How it’s done: An employee or group of employees makes accounting entries to overstate company assets or revenue, or understate expenses and liabilities. An employee will benefit from this type of fraud, for example, if compensation is tied to results or by possibly keeping the company in business (for example, appearing to meet loan covenants so the bank does not call the company’s line of credit.)

            There are numerous ways to commit fraud. The actual amount embezzled depends on the daring of the ‘frauder’, the degree of opportunity, if the perpetrator develops a conscience or moves on to another company or if the perpetrator is caught. Often, unfortunately, the fraud is not discovered and the company will never know that it has suffered a loss.

            Susan Madsen Dreier

            BPK&Z
            BPK&Z

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