Suggestions to Prevent Employee Fraud in the Workplace
I have previously blogged about the ever-increasing cost to society of fraud. Fraud in business organizations also seems to be on the rise despite all efforts to reduce it following well-publicized accounting frauds at Enron and WorldCom. According to research conducted by the Association of Certified Fraud Examiners (ACFE) in 2008, U.S. organizations lose an estimated 7 percent of annual revenues to fraud. Based on the projected U.S. Gross Domestic Product this percentage indicates a staggering estimate of losses around $994 billion among organizations, despite increased emphasis on anti-fraud controls and recent legislation to combat fraud. Also, the median dollar loss caused by fraud schemes was $175,000. More than one-quarter of the frauds involved losses of at least $1 million. The Sarbanes-Oxley Act (SOX) that was passed in 2002 established strict requirements for internal controls and an independent audit committee. While the jury is still out with respect to whether SOX is accomplishing its goal of reducing fraud, the ACFE Report to the Nation on Occupational Fraud & Abuse seems to indicate otherwise.
The ACFE 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.” The report is based on data compiled from 959 cases of occupational fraud that were investigated between January 2006 and February 2008. ACFE identified three categories of fraud including corruption, asset misappropriation, and fraudulent financial statements. Examples of corruption include conflicts of interests, bribery, illegal gratuities, and economic extortion. Asset misappropriation includes, among others, fraudulent disbursements and the misuse/theft of assets. The most common occupational fraud schemes were corruption (27%) and fraudulent billing (24%). Financial statement fraud was the most costly with a median loss of $2 million. Fraudulent financial statements come in many forms including asset/revenue over (under) statements, delaying (accelerating) expense recognition, and the failure to accrue for liabilities.
Employee fraud often starts small and is committed by someone given a great deal of authority over company funds with little supervision and poor internal controls that might otherwise help to prevent and detect the misuse of corporate resources. Often an employee will explain after being caught that it was an accident or one-time event because of some personal need. But the fraud can continue if misuse of company funds results in no consequences. Use of company credit cards is one of the bigger fraud concerns for businesses. For example, an employee’s trip to Walmart to pick up work supplies easily can lead to temptation as basic as wanting to pick up a few dinner items while in the store. These events snowball into bigger ones and more frequent trips to Walmart and other retailers ostensibly to purchase supplies for the company. One way to control for the inappropriate expenditure of company funds for personal purchases is for employers to require receipts for all purchases and, if they cannot do so, then employees should reimburse the company. More extensive controls are needed including to require approval for expenditures over an certain amount and/or through the use of the company credit card.
So why is it that employees feel free to use corporate funds to pay for personal purchases? I believe it reflects the general decline of ethics in society. Over the years we have morphed into an entitlement society and one in which we pursue our own self-interests without regard to how our actions affect others. It’s an ethical slippery slope that can only lead to bad things for our economy unless we can learn to put what is right and proper ahead of what we want for ourselves and feel entitled to have.
Blog posted by Steven Mintz, aka Ethics Sage, on September 7, 2011