Occupational fraud: insight into the perpetrators

Ken Dulieu examines how employees’ positions, tenure length and behaviour may explain patterns in occupational fraud

Each year, the Association of Certified Fraud Examiners (ACFE) releases a comprehensive report on occupational fraud. The ACFE Report to the Nations is a goldmine of information for businesses wanting to understand and negate the fraud risk they face.

One of the key areas they cover is an in-depth insight into the perpetrators of fraud. The report examines several metrics that can be used to build a profile of the type of person and the behavioural patterns that can help quickly identify potentially fraudulent behaviour.

Most employees are honest but even a tiny percentage of a global workforce that numbers over 3 billion equates to a huge number of individuals willing to perpetrate fraud.

Understanding the warning signs and a broad demographic of the most likely perpetrators is a useful component of any business’s anti-fraud policy.

Perpetrator’s position 

A key finding was a direct correlation between the size of the fraud and the perpetrator's level of responsibility. Indeed, it noted that employees were responsible for 37 per cent of fraud cases, while managers were responsible for 39 per cent and those in executive positions 23 per cent.

The report also reveals that the higher up in an organisation’s hierarchy the perpetrator is, the greater the length of time taken to uncover the fraud. And once again, a clear trend can be seen in the data, with a direct correlation drawn between the length of tenure and the fraud size.

Those who worked in the organisation for between one to five years accounted for 47 per cent of fraud cases, followed by those who held their positions for between six to ten years who were responsible for 25 per cent of incidents. Workers who were employed for less than one year committed 9 per cent of fraud.

The tenure of the perpetrator is something that the report covers in great detail. It draws several other comparisons between the length of tenure and the nature of the fraud:

·        Long-tenured (ten years or above) perpetrators steal almost three times more than moderate-to-low tenures (under five years).

·        Long-tenured perpetrators take longer to uncover: 24 months compared to ten months.

·        Long-termed perpetrators are more likely to collude.

·        Low to moderate tenured perpetrators were more than twice as likely to have been previously fired or punished for fraudulent activity.

Perpetrator’s department

Another factor that can help organisations to more effectively allocate anti-fraud resources is the perpetrator’s department. Eight departments account for more than 76 per cent of all occupational fraud. These include operations, accounting, upper management, sales, customer service, purchasing, administrative support and finance.

Operations employees were responsible for 15 per cent of fraud cases, while those in accounting committed 12 per cent and those in upper management and sales each held 11 per cent of perpetrators.

It is also worth noting that board of director level fraud cases made up three per cent of the total, with median losses of £423,000.

Behavioural red flags

Knowing the warning signs that could be associated with occupational fraud can help to increase the chances of detection. The median duration of fraud schemes in the report was 12 months, so perpetrators may be exhibiting ‘red flag’ warning signs for a year or more.

The most common red flags are listed below:

·        Living beyond their means: 39 per cent.

·        Financial difficulties: 25 per cent.

·        Unusually close association with vendors/customers: 20 per cent.

·        Unwillingness to share duties/control issues: 13 per cent.

·        Suspiciousness/defensiveness/irritability: 12 per cent.

·        Intimidation and bullying: 12 per cent.

·        Family problems/ recent divorce: 11 per cent.

·        Wheeler dealer attitude: ten per cent.

·        Pressure from within the organisation: eight per cent.

·        Issues with addiction(s): seven per cent.

·        Complained about being poorly paid: seven per cent.                    

·        Refusal to take holidays: seven per cent.

·        Social isolation: six per cent.

·        History of legal problems: five per cent.

·        Complaining about a lack of authority: five per cent.

·        Other employment problems: four per cent.

·        Excessive pressure to succeed (family and peers): four per cent.

·        Excessive absenteeism or lateness: three per cent.

·        Unstable life circumstances: three per cent.

·        Excessive use of the internet: two per cent.

·        Other: six per cent.

Only 15 per cent of those included in the survey showed no behavioural warning signs before the fraud was uncovered. In other words, the vast majority of those involved in fraudulent behaviour will show at least one red warning flag.

Key takeaways

Armed with the above information, it is possible to more precisely tailor anti-fraud procedures. While these are the main factors that the study looks at, there are further areas covered that can help to hone the deployment of anti-fraud resources.

·        Gender: 73 per cent of fraud was committed by male employees, however, the median loss for male employees was only 25 per cent greater than the median loss caused by women.

·        Perpetrator's age: The majority of frauds are committed by people aged between 31 and 50. This age group accounted for 68 per cent of all frauds. Another note is that the older the perpetrator the greater the median loss. For example, over 60s committed only three per cent of frauds but the median loss was £677,000.

·        Education Level: school graduates, people with a little university or college education and those with post-graduate degrees were all quite similar. Only 4 per cent covered the three categories: School graduates committed 20 per cent of the fraud, those with a postgraduate degree committed 16 per cent of fraud and 18 per cent were attributed to employees with some college education. By far the highest percentage is attributed to employees with a university degree. This demographic was responsible for 47 per cent of the surveyed frauds.

·        Multiple Perpetrators: most fraud was carried out by a single perpetrator (42 per cent). But this figure is closely mirrored by frauds that are committed by three or more perpetrators (38 per cent). Only 20 per cent of cases had two perpetrators.

·        Criminal Background: only 6 per cent of perpetrators had previous fraud convictions. However, the report notes that many uncovered frauds go unreported to law enforcement and as such the true figure is likely to be higher.

Lessons learned

The professional services sector is open to fraud at a higher level. The ACFE report confirms this with one simple stat: the median loss for all industries is £6785 per month, whereas the professional services sector had a monthly median loss of £8,666.

Once again, strong vetting procedures should be an integral part of the process. But this should be backed up by procedures that inhibit the potential for fraud including: -

·        An open workplace where staff are encouraged to voice their concerns.

·        Segregation of duties to minimise the risk of cover-ups.

·        Strong internal and external audit procedures.

The purpose of this article is not to produce a working environment where suspicion thrives. Most of us will go through life without being the victim of fraud of any meaningful size and the overwhelming majority of any workforce are law-abiding and conscientious workers.

However, it does set a template that can be used as a valuable tool to minimise the risk of fraud. The red flags discussed in the article are a major component and understanding their relevance as a potential signpost that fraud is being perpetrated is incredibly useful. Many of the other metrics are less specific but are still valuable tools when fraud risks are being assessed.

Ken Dulieu is chairman and chief executive of Capcon Limited capcon.co.uk