Fraud - An Inside Job

March 20, 2013

Fraud - An Inside Job

No company is immune. Microsoft. Facebook. Yahoo. Amazon. Barnes & Noble. 7-Eleven. These are all companies that have fallen victim to outside fraud.

While outside fraud stories involving large corporations tend to make national news, fraud remains predominately an inside job. Two-thirds of known fraud cases in 2012 were committed by insiders; people known and trusted within the organization. In addition, smaller businesses and nonprofits are typically more vulnerable to fraud due to a lack of internal controls.

The loss is staggering. Business fraud losses in the U.S. are estimated to exceed $500 billion annually with embezzlement accounting for $100 million in annual losses. The type of fraud committed is often related to the level of the employee.

Insider Management Fraud
When fraud is committed at management level, the fraud most frequently involves bribery, influence peddling, price fixing and manipulation of financial statements. 65 % of management fraud is committed by men; typically in the age range of 36-45 and they are often long term employees. Watch for personality traits that include lack of empathy, failure to accept responsibility for their own actions, exaggerated self-worth, superficial charm, shallowness and pathological lying.

Red flags should go up with this group when a complex business structure is in place for no apparent reason, one person has unchecked control of duties or there are inconsistencies in reporting to company executives.

Insider Employee Fraud
Embezzlement and theft of company property are the primary types of fraud committed by individuals. Employee fraud can also involve vendor kickbacks, expense account and company credit card abuse, unauthorized use of property and travel and entertainment (T&E) fraud.

The typical profile of an embezzler is a female in her mid-40’s who is generally viewed as trustworthy, helpful and hard-working. Low self-esteem and compulsive behavior are common personality traits. Usually, the embezzler acts alone, steals continuously over a period of years and takes increasing amounts of money until being caught.

Red flags include employees who work odd hours, take little or no vacation, express real or imagined grievances, have access to money or other company assets, have a history of drug or gambling abuse and who live a lifestyle that does not match income.

Developments in technology have created new opportunities for fraud. Stay tuned for a follow-up post summarizing the current trends surrounding fraud.