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Is your Firm Susceptible to Occupational Fraud?

By Robert K. Minniti

Many business managers concentrate on the external operations of the business, obtaining and providing services to the client, and often pay scant attention to the internal operations as long as deadlines are met and clients are satisfied. Over time management gets complacent on enforcing the internal controls of the organization and puts excessive trust in their employees. These trusted employees then have the opportunity to commit occupational fraud and misappropriate the assets of the business.

The Association of Certified Fraud Examiners reported in its 2014 Report to the Nations on Occupational Fraud & Abuse that on average an occupational fraud is perpetrated for 18 to 24 months before being discovered. Further the median loss due to occupational fraud for private companies was $160,000 in 2013. They also noted that smaller organizations of less than 100 employees were the most frequently victimized and suffered the highest median losses from fraud. The report further indicated that in 2013 the six most frequently perpetrated fraud schemes discovered at small businesses were: corruption, billing schemes, check tampering, non-cash frauds, skimming and expense reimbursement fraud.

In another study titled Occupational Fraud: A Study of the Impact of an Economic Recession, the Association of Certified Fraud Examiners reported that over 55 percent of organizations had seen an increase in employee fraud and 48 percent had seen an increase in the amount of losses due to fraud since the start of the current recession. The report further stated that employees pose the biggest risk of fraud to an organization and with the current economic conditions employees are under more pressure to commit fraud. Due to layoffs, reduced hours, pay cuts, furloughs and benefit reductions, it is easier for employees to rationalize the decision to defraud their employer.

Generally, three conditions must be present for an employee to commit fraud against their employer – this is known as the fraud triangle. First, the employee must have some form of economic pressure on them that requires a need for more money than they currently have. This could be the result of medical bills, a home in foreclosure, past due loans, drug addiction or gambling problems. Because of the current economic recession the pressures on employees are extremely high.

The second thing necessary for fraud to occur is rationalization. The employee needs to be able to rationalize that their behavior is necessary or that they had no other choice but to commit the fraud. The final condition is opportunity. The employee must have the ability and opportunity to commit the fraud.

Although firms can do nothing to affect the pressures placed on an employee, and little to affect an employee’s ability to rationalize their behavior, employers do have the ability to control the employee’s opportunity to commit fraud. This can be accomplished by having good internal controls that are enforced and frequently monitored. The Association of Certified Fraud Examiners study shows that some of the best internal controls for reducing occupational fraud are: surprise audits, fraud training for managers and employees, job rotation and mandatory vacations, a fraud hotline, employee support programs, internal audits, a written anti-fraud policy, a written code of conduct, and rewards for whistleblowers.

Robert Minniti is the president of Minniti CPA, LLC. He is a certified public accountant, certified fraud examiner, certified forensic accountant, certified valuation analyst, chartered global management accountant is certified in financial forensics and is a licensed private investigator. For more information visit