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Can You Identify Who's Going To Steal From Your Company?

January 06, 2011

One theme that has been in the news over the past several months is the fact that accounting fraud has risen significantly over the past couple of years.

One theme that has been in the news over the past several months is the fact that accounting fraud has risen significantly over the past couple of years. Who didn’t see that one coming? Increased unemployment, the resetting of interest rates on adjustable rate mortgages, and the loss of personal wealth (mainly from declines in home values) are all reasons why we have seen a spike in this type of fraud.

At the end of my last post, I had mentioned that I was going to start to discuss some of the different types of fraud. As I think it’s important to understand who might be perpetrating the fraud, we’ll get into that topic next time.

So, you ask, what type of person is most likely to commit fraud? According to the 2008 Report to the Nation on Occupational Fraud & Abuse report (the Report) published by the ACFE, research shows that:

• Fraud is a man’s world. According to the survey, males are more than twice as likely to commit fraud as their female colleagues. Significantly, the median loss of fraud by men is more than twice as great as frauds perpetrated by women, according to the study.

• Many fraudsters are in their forties. The highest percentage of fraudsters in the study were between the ages of 41-50 (in more than half of all cases, the perpetrator was over 40). Generally speaking, older professionals often occupy positions with authority and more access to company resources. The Report finds that the median loss from fraud rose as the age of the fraudster increased. Schemes perpetrated by individuals in their 50s resulted in a median loss of $500,000, twice as high as any age bracket below them.

• The ‘lone wolf’ versus cooperative crooks. In nearly two-thirds of the fraud schemes covered by the study, the perpetrator acted alone. Yet when the scheme did involve collusion of two or more parties, the results were much more costly. Cases of collusion resulted in a median loss over four times higher than the amount lost to fraudsters acting alone. This might mean that collusion enables employees to better circumvent controls that might stop a single perpetrator.

• Education and position. Most perpetrators have attended or graduated from college.
About 11 percent have obtained a post-graduate degree. In general, the higher the education level, the more costly the fraud. Furthermore, the highest percentage of fraudsters worked in the accounting department when they executed their scheme. Because these employees handle financial transactions, they normally have the easiest access to fiscal assets and the most opportunity to conceal a fraud. Executives and upper management made up the second-most common category of fraudsters. The least common perpetrators? Internal auditors.

• Living the fraud life. According to the Report, there are several behaviors that serve as red flags displayed by perpetrators. The two most common traits are a tendency to live beyond one’s means, and a struggle with financial difficulties. More than a third of those identified displayed at least one of the aforementioned behaviors, and about 20 percent had either a “wheeler-dealer attitude,” control issues (unwillingness to share duties), or personal problems, such as a divorce. Other red flags might include irritability or defensiveness, addiction problems, past legal problems, refusal to take vacation and complaining about inadequate pay.

If you’d like to learn more about the findings in the Report, you can download online at the ACFE’s web site:

There are several other studies out there that have come up with similar conclusions. I don’t think there is anything too surprising in the results, but don’t be fooled. I’ve seen frauds committed by men and women much younger and much older. However, the one theme that you should focus on is the fact that these people are in positions of power and influence within their respective organizations. If those positions are appropriately monitored, your exposure can be reduced significantly. Remember, it’s much easier (and cheaper) to prevent fraud than it is to detect it and recoup your loss.

The ability to appropriately monitor these positions is predicated on the fact that you know what risks your company are exposed to, and how you can appropriately mitigate them. Having an understanding of the different types of frauds and how they can be perpetrated can be very helpful in assessing your exposure. We will start to explore these areas in my next post.

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