Who commits fraud?

When management envisions who might be most likely to commit fraud in their organisation, they may think of a new employee who hasn’t earned the trust of their colleagues yet, or perhaps a lower-level employee who has been given too much access to cash or inventory. Or, as I have seen most often, management simply does not think any of their employees would commit fraud. These assumptions are not only incorrect, but they could end up costing the organisation millions.

While people commit fraud for a variety of reasons, criminologist Dr Donald Cressey hypothesises that three factors need to be in place for a fraud to begin: pressure, perceived opportunity and rationalisation. Together, these form the Fraud Triangle. The underlying pressure can come from within the organisation, such as unrealistic sales goals for employees, or it can be personal, such as an employee struggling financially due to a costly divorce or a gambling addiction. A perceived opportunity is present when a potential fraudster sees how they’d be able to commit fraud and not get caught. For example, maybe an employee is able to both approve company purchases and authorise payments to vendors. Or perhaps they know there is no oversight for expense reports. Rationalisation can take the form of an employee believing they aren’t fairly compensated for their work, or even thinking that an act of fraud would only happen once, and they’d pay it back before anyone noticed.

In the latest edition of the Association of Certified Fraud Examiner’s (ACFE) Report to the Nations, 2,504 fraud cases from 125 countries were analysed to gain a clear understanding of patterns and trends in occupational fraud. In addition to looking at the fraud schemes and how they were detected, the report examined the characteristics of those who perpetrated the frauds.

Non-managerial level employees were the most common perpetrators, representing 41 per cent of cases, with mid-level managers being the perpetrators in 35 per cent of the cases. While owners/executives only accounted for 20 per cent of cases, they caused the most financial damage and their fraud schemes lasted the longest before being discovered. Fraud perpetrated by an owner/executive had a median duration of two years and caused a median loss of $600,000.

The length of time a fraudster had been at the organisation mattered as well. Fraud was most commonly perpetrated by employees who had worked for the victim organisation from one to five years; these cases resulted in a median loss of $100,000. Employees who had been employed from six to 10 years represented 22 per cent of cases and caused a median loss of $190,000, and those with more than 10 years’ tenure represented 23 per cent of the cases and a median loss of $200,000. While some people may assume newer employees pose a higher risk, individuals who had been with the organisation for less than a year only comprised 9 per cent of the cases and caused a median loss of $50,000.

Other demographic factors such as gender, education and age also influenced the amount lost. Male perpetrators were more common than female, accounting for 72 per cent of fraud cases studied, and caused a median loss of $150,000, compared with $85,000 caused by female perpetrators. Of the cases analysed, 64 per cent of fraudsters had a university degree or higher; these perpetrators also caused a significantly higher median loss ($195,000) than those without a university degree ($100,000). Additionally, losses tend to rise with the perpetrator’s age. Perpetrators younger than 40 caused a median loss of $75,000, those aged between 40 and 54 caused a median loss of $150,000 and fraudsters over 55 caused a median loss of $425,000.

While perpetrators varied in their demographic data, there were consistent behavioral red flags that they displayed. The most telling was living beyond their means – 42 per cent of fraudsters exhibited this characteristic, which has been the most common red flag in all of our studies since 2008. Additionally, 26 per cent had known financial difficulties, 19 per cent had an unusually close relationship with vendors or customers, 15 per cent displayed control issues (such as an unwillingness to share duties) and 13 per cent showed irritability, suspiciousness or defensiveness. There were also HR-related red flags in many cases: 13 per cent of fraudsters had poor work evaluations, 13 per cent had excessive absenteeism, 12 per cent displayed a fear of losing their job and 10 per cent were denied a raise or promotion.

While the fact that some employees display red flags or fall into higher-risk demographic categories does not necessarily mean they will commit fraud, being aware of these factors can help business leaders at any type of organisation recognise early warning signs and protect themselves and their employer from fraud.

Find free fraud training and awareness resources at FraudWeek.com. For more information on fraud prevention and detection, visit ACFE.com.

by Bruce Dorris, President and CEO, ACFE