Detecting Misappropriation Schemes

Train to focus analytical and substantive tests on the flow of cash through the company, utilizing financial and nonfinancial information. You'll learn to identify critical signs of misappropriation of assets and analyze fraud schemes. Course highlights include a framework for detecting misappropriation schemes and fraud schemes in such areas as cash, inventory, fixed assets and payroll disbursements.

Objectives: 

• Identify critical signs of misappropriation of assets
• Develop policies and procedures to prevent fraud

Prerequisite:  Experience in working on fraud examination engagements.

Chapter 1 - The Pervasive Threat of Employee Theft

Learning Objectives

• Develop an understanding of the depth, breadth, and trends of occupational fraud as a crime.
• Develop awareness of the types of occupational fraud and abuse.
• Understand the losses associated with occupational fraud and abuse, and asset misappropriation in particular.

Introduction

Occupational Fraud is defined as the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the organization's resources or assets.

In other words, occupational fraud and abuse occurs when an employee commits fraud against his/her employer. The threat of occupational fraud looms over every private business or public agency, regardless of its size, stature, or function. Research reveals that the frequency and costs of occupational fraud are staggering.

In 1983 Hollinger and Clark conducted a survey of more than 9,000 employees representing three industry segments. Approximately ⅓ of respondents admitted to stealing some form of company property during their tenure.¹

In 1993 the Association of Certified Fraud Examiners surveyed over 2,500 Certified Fraud Examiners who had collectively investigated more than one million cases of criminal and civil fraud.

Respondents estimated that, within their own companies, fraud and abuse equaled approximately 6% of annual revenues. The authors reported the average organization loses more than nine dollars a day per employee to fraud and abuse.²

Occupational Fraud and Abuse

Ernst and Young's International Fraud Survey, conducted in 1998, involved 1,205 senior executives from major organizations in 32 countries. Researchers reported more than one half of the organizations had been victimized by fraud within the prior year. Thirty percent of those organizations had suffered more than five frauds in the prior five years.³ Eighty-four percent of the worst frauds in the survey were committed by employees.⁴

2006 Report to the Nation on Occupational Fraud and Abuse

In 1996, the Association of Certified Fraud Examiners released the first Report to the Nation on Occupational Fraud and Abuse, the largest known privately funded study on the subject. The stated goals of that report were to

• Summarize the opinions of experts on the percentage and amount of organizational revenue lost to all forms of occupational fraud and abuse.
• Examine the characteristics of the employees who commit occupational fraud and abuse.
• Determine what kinds of organizations are victims of occupational fraud and abuse.
• Categorize the ways in which serious fraud and abuse occurs.

The ACFE released updated editions of the Report in 2002, 2004, and 2006. Like the first study, each subsequent edition was based on detailed case information about specific frauds provided by the CFEs who investigated those cases. The 2006 edition of the Report is based on 1,134 actual cases of occupational fraud.

Copies of the entire Report to the Nation can be downloaded or viewed at no charge on the ACFE's website, www.ACFE.com.

Measuring the Cost of Occupational Fraud

It should be clear to anyone who has spent time dealing with the subject of occupational fraud that attempts to accurately measure the frequency or cost associated with occupational fraud in the United States will be, at best, incomplete. Fraud, by its nature, is hidden, and so the true amount of fraud taking place in U.S. businesses at any one time cannot really be known.

Even attempts to measure the amount of fraud that has already been detected will lead to incomplete results. There is no central repository where fraud data is collected in the U.S. and a great deal of fraud cases go unreported, either because the victim organizations do not recognize that they have been defrauded, because they choose not to report the crimes for fear of bad publicity, or simply because they do not want to deal with the repercussions. Furthermore, even when fraud has been detected it may not be possible to determine exactly how much was stolen. Many frauds go undetected for years before they are caught, and organizations may find it unproductive or unsettling to trace through years of historical financial data to put a precise figure on the size of the crime.

Nevertheless, it is important to try to learn as much about occupational fraud as possible. This is a crime that affects, or has the potential to affect, every business in the United States - indeed, in

¹ Richard Hollinger and John Clark, Theft by Employees (Lexington, MA: Lexington books, 1983), p. 42.
² The Association of Certified Fraud Examiners, The Report to the Nation on Occupational Fraud and Abuse (Austin, TX: ACFE, 1996), p. 14.
³ Ernst & Young International Fraud Group, Fraud: the Unmanaged Risk: An International Survey of the Effects of Fraud on Business (London, UK: Ernst & Young, 1998), p. 2.
⁴ Ernst & Young, p. 8.

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