Fraud…….does it effect you?




6% is a pretty good interest rate these days, or it could be the profit margin on a product your company sells. Unfortunately, it is also the estimated average amount that organizations lose to fraud and occupational abuse annually according to the Association of Certified Fraud Examiners 2002 Report to the Nation on Occupational Fraud & Abuse.

The report is the second issued by the association in six years and was based on detailed case information supplied by certified fraud examiners who had first-hand knowledge of the incidents they reported. This study covers 663 occupational fraud cases that caused over $7 billion in losses. All organization types are included in the report: publicly traded and privately held companies, non-profit organizations and government agencies.

There are some interesting findings and implications from the report summaries that have implications for all organizations. I’ll highlight a few of them that I believe are important for managers and business owners to be aware of in their daily operations to best protect their organizations’ assets:

The typical perpetrator is a first-time offender. Only seven percent of occupational fraudsters in this study were known to have prior convictions for fraud-related offences.

Your organization should be performing proper background checks on new employees entering your organization. To me, this finding does not mean that the perpetrators did not commit frauds in past positions held or companies they worked in. It means that there are no records of criminal convictions for fraud for that individual. This makes sense because many organizations do not file criminal complaints on fraudsters – there is not much business benefit for doing so. They fire them.

This makes the case for performing proper background checks even stronger. Paying for professional pre-employment background screening services will pay huge dividends in detecting potential miscreants before they are on your payroll. This is what you want – not to allow these types of people through the doors and cause damage to your organizations.

Small businesses are the most vulnerable to occupational fraud and abuse. The average scheme in a small business causes $127,500 in losses. The average scheme in the largest companies costs $97,000.

Due to their size, small businesses rely on trust in their employees to operate efficiently. Basic business controls such as separating duties can be difficult and challenging. However, these controls are an important aspect of managing a small business because the magnitude of the loss relative to the size of the business has a much greater impact.

• The most common method for detecting occupational fraud is by a tip from an employee, customer, vendor or anonymous source. The second most common method is by accident.

In the report, tips from all sources for the identified fraud cases made up 46.2% of the total. Frauds detected by accident were 18.8%. Less than half were detected by an audit or caught by internal controls. The people who steal from organizations have a good knowledge about the functions of the operation. They may have designed the business systems and have a high level of authority. A key component to a fraud is to take conscious and intentional effort to conceal the existence of the act.

• The median length of time from inception to detection for the occupational frauds was 18 months.

The time to detect frauds is definitely skewed to a longer period than a shorter one. In the report less than 4% of the cases were detected within the first month after the fraud had started. Over 70% of the cases ran more than 12 months before detection. This is due primarily to the fact of intentional concealment cited above, insufficient or ignored internal controls to prevent frauds from starting and audits that do not have specifically designed tests to uncover incidents of fraud.

• There was a fairly even split between organizations with insufficient controls and organizations in which controls that could have prevented fraud were ignored. In about 11% of the cases, respondents judged that the scheme could not have been prevented by standard internal controls.

Somewhere between when the fraud is detected and the investigation has been completed someone will ask “How did this happen?” In the surveyed cases, it was a pretty close to even between not having proper business processes established and not following the processes if they were in place. This is planning the work, working the plan and making sure you have the proper checks and balances in place to ensure the plan doesn’t go off the rails! Having professional help establishing your plan pays huge returns in avoided problems down the road.

• A strong system of internal controls was viewed as the most effective anti-fraud measure by a wide margin.

The people who responded with cases for the report were certified fraud examiners in the United States whose primary job is to investigate incidents of fraud. The overwhelming majority of these professionals who responded to the survey believe that planning and enforcing adequate internal controls is the most effective way to deter fraud from occurring in organizations. A distant second is background checks and last was workplace surveillance.

The study accounts for only the effects of fraud on organizations. It does not include things such as lost business from computer crashes, power outages, or robberies.

Fraud is a serious problem for organizations but with a little help, careful planning and diligence, the effects of this crime can be reduced in organizations.

This report can be accessed on the internet at

Warren Leonhard is the president of Lyndon Conrad, a company that creates strategic asset protection plans for all types of organizations. The company web site is

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