The Business/Legal Investigator

January 12, 2009

In This Issue:

2008 Occupational Fraud & Abuse Report to the Nation


First, I wish to thank everyone for the positive feedback and kind words of encouragement relative to this newsletter. A labor of love always appreciates recognition! Through this medium we will continue in our efforts to provide you with insightful information. Our goal is to foster the protection of profits and the prevention of losses for our clients. In the current economic situation, I am sure you agree, attention to business risks is a critical component of staying the course.

This month we offer a Q & A which summarizes the 2008 Report to the Nation on Occupational Fraud & Abuse. This professional survey is published by the Association of Certified Fraud Examiners (ACFE) each year. It reveals fraud trends and is derived from input by Certified Fraud Examiners taken from actual cases. Taking exerpts from the Report, I concentrated on those issues facing small businesses here in Southwest Florida. This, however, does not begin to cover all the valuable data within the ACFE Report; rather, it is intended to stimulate your interest in the prevention and detection of fraud in your business. I will gladly provide you with a copy of the complete Report at no cost...just email or call. To my attorney clients, I invite you to order and forward the Report to your business clients, as well. You will find it probative and interesting!


David B. Watts, CLI, CFE

ALLIED BUSINESS SOLUTIONS, solely owned d/b/a of
Interprobe Affiliates, Inc. a Florida Corporation
(Our twentieth year serving our clients in Soutwest Florida!)
FL Lic. No. A89-00394



(Exerpts from Executive Summary)

The term "occupational fraud" is defined as: "The use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employer's resources or assets."

... Just how serious is fraud for small businesses?

Small businesses are especially vulnerable to occupational fraud. The median loss suffered by companies with fewer than 100 employees was an astounding $200,00.00! This figure is higher than the median loss in any other category of fraud, including the largest organizations. If that isn't bad enough, the typical business surveyed lost 7% of its annual revenues to fraud! Check tampering and fraudulent billing were the most common small business fraud schemes. Employee fraud tends to be extremely costly for the small business owner and frequently continues for years before it is detected.

... Who are these fraudsters?

Nearly all fraudsters are first time offenders, according to the survey. Only 7% of perpetrators in the study had prior convictions and only 12% had been previously terminated for fraud-related conduct. These statistics would lead us to believe that the lack of adequate internal controls is the most commonly cited factor allowing fraud to occur and not necessarily careless hiring practices. The Report asserts that in two-thirds of the fraud schemes studied the perpetrator acted alone; however, when two or more were involved the median loss was over four times higher than with just the single perpetrator. That likely means that controls were circumvented by colluding with another who has specific access. While all ages are represented, it seems the older the fraudster, the higher the median loss.

How is fraud detected?

Of particular interest is that occupational frauds are much more likely to be detected by a tip than by audits, internal controls or any other means. No less that 46% of the cases in the Report were uncovered by tips from employees, customers, vendors and other sources. There is, however, an indication that internal controls were credited with catching a slightly larger number of frauds, compared to the last survey done in 2006. Small businesses tend to have fewer or weaker controls in place than larger companies. This is primarily due to lack of personnel or financial resources.

... What are the indicators of fraud?

Fraudsters often display behavioral traits that serve as indicators of possible illegal behavior. The most commonly cited behavioral red flags were perpetrators living beyond their apparent means (39%) or experiencing financial difficulties at the time of the fraud (34%). Here are some other indicators for potential employee fraud: Bad attitude, Unwillingness to share duties, Divorce and other family problems, Unusual closeness with vendors, and Addiction problems.

... Which departments are most vulnerable?

The reports states that 29% of frauds were committed in the accounting department, while 18% were attributable to executives and upper management.

...How can I reduce the potential for fraudulent activity in my business?

The best way to keep your business from becoming a victim of fraud is to undergo a "Fraud Risk Assessment. " This tool is an excellent way to examine your current vulnerabilities and to learn about internal controls that put up road blocks against fraud and employee theft. Further, it offers suggestions enabling you to institute training sessions on the ethics and anti-fraud polices of the company. This service is a specialty of the Fraud Investigator and the Certified Fraud Examiner.

... What should I do if I suspect fraudulent activity?

After confirming the loss, you should first bring your company attorney into the loop. You must not haphazardly begin an investigation, as your well-intended initial actions may result in further damage in the form of a law suit against you! The decision whether or not to involve law enforcement should be made early on. Remember, once law enforcement takes over you lose control of the inquiry and the publicity that a criminal case would bring can be worse than the original loss. That is not to say that there are certainly times to turn the matter over to the police; but that decision should be reached as early as possible, as it dictates the manner in which the investigation proceeds.

Next, you should determine if the facts at hand constitute " Predication." That means we cannot just go off and begin investigating anyone without some rationale behind it. Predication does not have to rise to the level of probable cause as in a criminal case, but there should be something present that would lead a reasonable person to believe that a proper inquiry should be undertaken. For example: You receive a tip that employees in a certain department are cheating on their time sheets and covering for one another. Perhaps a close review of the time sheets measured against work reasonably performed in that context would confirm the allegation. If there are descrepancies, predication is clear and an investigation would be in order. If not, it could be a jealous co-worker trying to cause trouble for someone else.

Another example: You hear that your bookkeeper suddenly has an expensive new car, a boat, and a purchased a new home near the ocean. He seems to be living above his means. Further, he refuses to take time off and even showed up for work during what was supposed to be his vacation time. You decide that a "random" audit of the books is done. Again, predication will or will not be present, depending on the outcome. No one has been singled out , accused or had their privacy invaded.

Finally, you should engage a Fraud Investigator who has the experience to gather and examine all the facts and to present them in a cogent and legally acceptable format, while working with your company attorney.


Joseph T. Wells, CFE, CPA, is founder and Chairman of the Association of Certified Fraud Examiners. He has published 14 books and nearly 200 articles on fraud.

return to newsletter archive

Getting the facts…that’s what we do!