Organizations incur costs to produce and sell their products or services; these costs run the gamut: labor, taxes, advertising, occupancy, raw materials, research and development-and, yes fraud and abuse. The latter expense of fraud and abuse, however, is fundamentally different from the former: The true expense of fraud and abuse is hidden, even if it is reflected in the profit and loss figures. The 2006 Report to the Nation on Occupational Fraud and Abuse estimates that U.S organizations lose 5% of their annual revenues to fraud. Applied to the estimated 2006 US GDP (Gross Domestic Product), this figure would translate to approximately $652 billion in fraud losses. For closely held businesses the median loss suffered by organizations with fewer than 100 employees was $190,000 per scheme.
This is a subject that most business owners and managers would like to believe is not an expense to their business. Unfortunately it is a real possibility unless one is diligent, aware of the possibilities and a guardian against the environment that fosters behaviors far less than desired.
You may be asking yourself, “Why do I want to know about fraud and abuse in the work place.” The answer is that good people need to be vigilant and vigilance requires knowledge. My hope is that these articles will be informative. Myself and a few of my partners are studying and working to becoming CFEs (Certified Fraud Examiners) to support our clients through good education and sound business controls. I hope you will not experience any occupational fraud or abuse in your business or professional careers. Let’s get started.
What is occupational fraud and abuse?
Joseph T Wells, CFE CPA, defines “occupational fraud and abuse as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” This involves a wide variety of conduct by any person in an organization ranging from sophisticated investment swindles to petty theft. Common violations include asset misappropriation, fraudulent statements, corruption, pilferage, false overtime, using company property for personal benefits and payroll and sick time abuses. The first Report to the Nation on Occupational Fraud and Abuse, set forth in 1996, states, “The key is that activity (1) is clandestine, (2) violates the employee’s fiduciary duties to the organization, (3) is committed for the purpose of direct or indirect financial benefit to the employee, and (4) costs the employing organization assets, revenues, or reserves.”
Edward H Sutherland, a criminologist at Indian University (1883-1950), actually coined the phase “white collar crime” referring to the sharply pressed shirt collars found in the corporate world with their standard blue, red or black ties.
A brief example of “skimming.” A cashier at a fast food restaurant receives an order for a hamburger, fries and a drink totaling $4.00. The server provides the food and takes the cash. But wait, the cashier didn’t ring up the sale. Where did the money go? Into her pocket. What are lacking here are controls-one takes an order through the register requiring funds to close the order.