To prevent employees from playing tricks, you must recognize where occupational fraud occurs, who commits it and how to thwart it.
Occupational fraud can occur within any organization, but weak internal controls coupled with a vulnerable organizational culture increase the risk of fraudulent activity.
When faced with a perceived pressure employees identify a perceived opportunity and justify their actions with a perceived rationalization. The presence of these elements, known as Donald R. Cressey’s Fraud Triangle, along with weak internal controls, create the ideal environment for fraud.
The Association of Certified Fraud Examiners (ACFE) linked the lack of internal controls to 35.6 percent of frauds in 2012. To prevent employees from playing tricks on you, you must recognize where fraud occurs, who commits it and how to thwart it, so that you can establish and enforce the correct internal controls in your organization.
While fraud occurs within most types of organizations, these schemes impact the banking and financial services, government and public administration, manufacturing, and health care industries most frequently. . Tthe majority of victim organizations reported corruption as the primary source of fraud. However, in health care, the ACFE identified billing schemes as the most prevalent fraudulent activity. In fact, the study linked billing schemes, such as upcoding, unbundling and double billing, to more than one-third of health care frauds.
Upcoding, for instance, occurs when a provider submits a claim to either a health insurance company or government program for a procedure coded under a higher reimbursement amount than the service provided to the patient. Successful reimbursements of upcoding result in overpayment. In the fiscal year ending 2012, the Medicaid Fraud Control Unit recovered more than $161 million in overpayments, according to an Agency for Health Care Administration report (The Stats Efforts to Control Medicaid Fraud and Abuse 2011-2012).
Surprisingly, most perpetrators who commit occupational fraud have not previously engaged in criminal activity. Consider that 87.3 percent of fraudsters have never been charged with a crime, and only 5.6 percent have received prior convictions. The ACFE reported that employees (as opposed to managers, owners or executives) committed 41.6 percent of occupational frauds in 2012. Of those crimes, 65 percent were conducted by males, 19.6 percent were between the ages of 41 and 45, and 36.9 percent heldcollege degrees.
Those statistics help to identify the most common characteristics of a fraudster, but theydo not answer the most ominous question: What corner is the criminal hiding in?
The ACFE found that more than half of occupational fraudsters work in the accounting, operations and sales departments, with 22 percent representing employees in the accounting department. Another question: Have you reviewed the internal controls in your accounting department lately to see whether anyone is hiding behind a mask in your organization?
According to the ACFE, in 2012, nearly one in four frauds occurred when the perpetrator simply overrode the existing internal controls to execute the scheme. In 18.7 percent of frauds, perpetrators could commit frauds because managers did not complete reviews.
Clearly, investing in anti-fraud controls will increase the chances of fraud detection. Yet, small companies, those with less than 100 employees, invest fewer resources in anti-fraud controls—while nearly half of frauds in small companies result from the lack of internal controls. In 2012, only 55.7 percent of small companies that reported fraud engaged an external auditor compared to 91.4 percent of other companies.
Apart from engaging an external auditor, an organization interested in improving internal controls should perform surprise audits, establish internal audits, require mandatory vacations and job rotations, and implement a code of conduct. Other safeguards include a fraud hotline, an anti-fraud policy and a whistleblower reward policy. Establishing, enforcing and monitoring these anti-fraud controls, among others, will allow an organization to have a fighting chance of protecting itself against occupational fraud.
Editor’s note: Jennifer Gavrich is a senior associate for forensic accounting and litigation support at Cross Fernandez Riley. She provides consulting services in bankruptcy, insolvency, litigation, securities, fraud, economic damages and income replacement matters. [cfrcpa.com]