Occupational Fraud - pt 1 image

Financial Risks for Small Businesses

By Mark Palmer

Part 1 of 7  Occupational Fraud – Introduction

The Association of Certified Fraud Examiners defines Occupational Fraud as “The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”

A simpler definition… It’s when your employees steal from you.  The theft from your company (or organization) can be in the form of cash, inventory, assets, company time, or your company’s reputation.  It can happen a little at a time under the radar, or it can occur in large chunks with elaborate planning and intricate measures to conceal the fraud.  It can be performed by brand new entry-level employees or long-term, trusted senior-level employees, or even owners of the business.  Bottom line, it may be something from which your company can recover, or it may be something that will crush your company.

According to research performed by the Association of Certified Fraud Examiners, small companies are particularly vulnerable to fraud since they don’t have the resources that larger companies do, which means that they usually don’t have processes and controls in place to mitigate the risk of fraud.  A few findings from their study on occupational fraud:

  1. 87% of the cases in the study involved asset misappropriation (theft of cash, inventory, or other assets) with a median loss of $120,000 per organization
  1. The median losses by level of authority were:
    1. Owners / Executives – $573,000
    2. Managers – $180,000
    3. Other Employees – $60,000
  1. Frauds lasted a median of 18 months before being detected
  1. The amount of loss is in direct correlation with the tenure of the employee:
    1. Those employed by the organization more than 10 years – median loss was $229,000
    2. Those employed by the organization less than 1 year – median loss was $25,000
  1. 49% of the victims had not recovered anything from the perpetrator of the fraud
  1. Occupational fraud is a significant threat to small businesses. The smallest organizations in the study suffered the largest median losses.

What does all of this mean to you, the business owner, non-profit executive director, or manager who has certain fiduciary responsibilitiesDoes it mean that you should be paranoid of every one of your employees?  Certainly not.  But it does mean that you need to be aware of the various ways employees can steal from your company and what you can do to mitigate the risk of fraud and theft.  In many cases there are relatively simple and inexpensive processes or controls you can put in place to deter theft, or to bring it to light if it occurs.


Embezzle sticky note


This series on Financial Risks for Small Businesses, while not exhaustive or all-inclusive, will discuss different types of employee fraud, providing examples and suggested solutions.  Examples given will be from first-hand knowledge of the cases relating to the scores of companies I’ve either been employed by or consulted for over the 30 years of my career.  The specifics of each case will be discussed only in a way as to keep the individuals and companies involved confidential.


To kick it off, let me share with you a simple scheme prevalent in retail businesses relating to theft of cash:


 A store manager who is responsible for making daily cash deposits gets in a pickle and needs to “borrow” money from the company.  The daily deposits are then being made a day late, then 2 days late, then 3 days, etc.  What the manager is doing is “borrowing” the cash from day one’s sales and waiting for the cash that comes in on day two to then make day one’s deposit.  He may need to “borrow’ more cash which would then lengthen the delay in making deposits.

The reason I use the term “borrow” is that I’ve found in this particular type of theft that it’s not unusual to see an employee have a financial emergency arise and need cash quickly.  No attempt is made to permanently conceal the theft by altering sales or refund records indicating that the employee may have had the intention of repaying the money.  Regardless, in this case, he can’t repay it and the delay in deposits was noticed when the bank statements were reconciled.  By that time, however, the amount of loss had grown to a couple of weeks of cash sales, not just one or two days.  The solution to this particular scenario is to simply have someone go online to your bank account every day and match daily deposits to daily sales receipts from your POS system.  Initiate a zero-tolerance policy that deposits must be made every day without exception.  Then immediately investigate any exceptions.

While we all would like to assume that we’ve made wise decisions in  selecting who we have working for our companies, the truth is that sometimes even the most trustworthy people get desperate and steal from their employer.  It is important to be vigilant in protecting your company’s assets from theft. To learn more about how you can protect your company and its assets, continue reading our seven part series on Occupational Fraud.


NEXT ISSUE: Cashing-In: Catching False Receipts and Receivables


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