Business Valuations

Employees are entrusted to safeguard and control bank accounts, receivables, inventory, and the books and records of the company. While most employees will never abuse this trust, those who do commit fraud schemes can cause organizations to suffer significant financial losses. Fraud perpetrated by employees is known as “occupational fraud”.

The Association of Certified Fraud Examiners (ACFE) has released its report Occupational Fraud 2022: A Report to the Nations, which presents the factors and toll of occupational fraud. This article will provide some highlights from the ACFE report.

How is occupational fraud committed?

The three most prevalent categories are:

• Asset misappropriation: Stealing or misusing assets.
• Corruption: Using entrusted power for personal gain.
• Financial statement fraud: Deliberate misrepresentation of the financial results of an organization.

Interestingly, the least common category of financial statement fraud was the costliest resulting in a median loss of US $593,000, whereas the other two categories had median losses in the range of US $100,000 to $150,000.

Approximately 44 per cent of the frauds presented in the ACFE report occurred in private companies. The median loss suffered was US $120,000.

What primary internal controls were deficient to allow the fraud to occur?

There are two unique challenges facing small organizations in preventing and detecting fraud. First, many have limited financial resources and fewer employees, which requires individuals to perform many tasks. This restricts the ability to institute the anti-fraud controls that larger organizations implement. Second, due to smaller staff sizes, there is inherently a larger amount of trust needed among staff.

The data showed that about half the survey respondents indicated that the fraud may have been prevented had there been a stronger system of anti-fraud controls.

The following summarizes the five primary internal control weaknesses identified:

• Lack of internal controls  – 29%
• Override of existing controls  – 20%
• Lack of management review – 16%
• Poor tone at the top (ethically correct culture) – 10%
• Lack of competent personnel in oversight roles – 8%

How is occupational fraud initially detected?

The three most common methods that fraud was detected in the ACFE report were:

• Tips – 42%
• Internal audit – 16%
• Management review – 12%

Interestingly, about half of all tips came from employees and one-third were from external sources such as customers, vendors, and competitors.

The ACFE report demonstrates that there are actions that business leaders can take to mitigate the risk of fraud. A forensic accountant can assist in devising a fraud risk assessment and a reaction plan. The risk assessment plan can assist organizations in advancing its internal controls, policies, procedures, and training. The reaction plan is a framework of the agreed upon steps that should take place if fraud is detected.

If you have any questions or need further information, please feel free to reach out to the Litigation Support and Forensic Accounting group at Fuller Landau.

About the author

Bruce Roher, CPA, CA, CBV, CFF, CFE is a partner at Fuller Landau LLP leading the business valuations and forensic accounting practice. He can be reached at broher@fullerllp.com or (416) 645-6526.