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 2020 Report to the Nations on Occupational Fraud and Abuse (the “ACFE 2020 Report”) was based on data compiled from a study of 2,504 cases of occupational fraud that occurred in the workplace between January 2018 and September 2019.
The ACFE 2020 Report included the following statistics:
— The median loss caused by occupational fraud was $125,000 (USD), with 21% of cases causing losses of over $1 million (USD). Small businesses (those with fewer than 100 employees) had the highest median loss of $150,000 (USD).
— 70% of frauds occurred in for-profit organizations, with 44% of the victim organizations
being private companies and 26% being public companies, each suffering a median loss of $150,000 (USD).
— Over half (54%) 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 $600,000, the median loss caused by managers was $150,000 and the median loss caused by employees was $60,000.
— Most occupational fraud perpetrators are first-time offenders with clean employment histories. Approximately 86% had never been punished or terminated for fraud-related conduct by previous employers.
— The typical occupational fraud scheme lasts 14 months before it is detected and causes a loss of $8,300 (USD) per month.
— Fraud is most commonly detected through employee tips (50%).
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 2020 study concluded that organizations with anti-fraud controls in place experienced smaller fraud losses and detected frauds more quickly than organizations without anti-fraud controls.
Four anti-fraud controls in particular were associated with a 50% or greater reduction in both fraud losses and duration:
- A code of conduct
- An internal audit department
- Management’s certification of financial statements
- Regular management review of internal controls, processes, accounts, or transactions
While the presence of these mechanisms alone does not ensure that all fraud will be prevented, management’s commitment to and investment in targeted prevention and detection measures send a clear message to employees, vendors, customers, and others about the organization’s anti-fraud stance.
The 2020 ACFE Report identifies common characteristics of the perpetrators of occupational fraud:
• 53% of fraudsters were between the ages of 31 and 45 years old
• Fraudsters employed at their organizations for at least 6 years caused twice the loss
of less-tenured employees
• More than half of all occupational frauds came from the departments of Operations, Accounting, Executive/Upper Management or Sales
• Men were responsible for the perpetration of 72% of embezzlement schemes
• Men also caused a significantly larger median loss (USD $150,000) than women (USD $85,000)
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.