On April 8, 2013, the Milwaukee Journal Sentinel reported that the human resources manager for a major Milwaukee scrap recycling company had been charged with embezzling more than $1 million from the company over the past 6 years. Eight days later, on April 16, 2013, the Milwaukee Journal Sentinel reported that a former secretary at the Shorewood School District had pled guilty to embezzling approximately $310,000 while serving as a secretary in the Special Education Department.
The circumstances surrounding these embezzlements 1 seem consistent with conclusions and statistics reported in recent research regarding embezzlement and occupational fraud.
The Association of Certified Fraud Examiners 2018 Report to the Nations on Occupational Fraud and Abuse (the “ACFE 2018 Report”) was based on data compiled from a study of 2,690 cases of occupational fraud that occurred in the workplace between January 2016 and October 2017.
The ACFE 2018 Report included the following statistics:
— The median loss caused by occupational fraud was $130,000 with more than one-fifth of the losses totaling at least $1 million.
— Small organizations (those with fewer than 100 employees) both experienced the greatest percentage of cases in the study (28%) and suffered the largest median loss (USD 200,000).
— Over half (53%) of the victim organizations do not recover any of the fraud-related losses.
— The size of the fraud loss is often related to the position that the fraud perpetrator holds. The median loss committed by owner/executives was $850,000, the median loss caused by managers was $150,000 and the median loss caused by employees was $50,000.
— Most occupational fraud perpetrators are first-time offenders with clean employment histories. Approximately 85% had never been punished or terminated for fraud-related conduct by previous employers.
— Occupational fraud generally lasted approximately 16 months before being detected.
— Fraud is most commonly detected through employee tips (53%).
The vast majority (85%) of fraud perpetrators displayed behavioral red flags that are often associated with fraudulent conduct such as:
- Living beyond means;
- Financial difficulties;
- Unusually close association with vendors or customers;
- Divorce/family problems
- "Wheeler-dealer" attitude
The ACFE 2018 study concluded that organizations that have anti-fraud training programs for employees, managers, and executives experience less costly losses and shorter occurrences of fraud. In particular, providing individuals with a means to report suspicious activity is a critical part of fraud prevention. General internal controls, screening new employees, division of responsibilities, appropriate oversight, physical controls and computer-based controls can also assist in preventing fraud.
The 2013 Marquet Report on Embezzlement aggregated data from 2,698 major ($100,000 or more) embezzlements between 2008 and 2013 and came to the following conclusions regarding characteristics of the perpetrators:
• Major embezzlers begin their schemes in their early 40s. 2
• The average embezzlement spans approximately 4.7 years.
• Embezzlers are most likely to hold bookkeeping or finance positions (68.2% of all cases).
• Women are more likely to embezzle than men (57% vs. 43% overall).
• Men, on average, embezzled about 2.5 times more money than females.
• Gambling is a clear motivating factor driving some perpetrators (23.8%).
In both of the above from the Milwaukee Journal Sentinel and all of the embezzlement / fraud cases we have been involved in at The BERO Group, the common thread is something every accountant should have learned in accounting 101– when there is money flowing out of an entity, duties should be segregated.
1 Embezzlement is defined in most states as the theft of assets (money or property) by a person in a position of trust or responsibility over those assets.
2 In 2013, the average age of the perpetrator was 47.9 years. The average adjusted age (the average age minus the average duration) was 43.25 years.