In a perfect world, you can trust that the employees you hire will uphold the same integrity that you do in regards to the business you have built, but in reality you need to be aware of the areas where you are vulnerable.
In fact, occupational fraud cost organizations about 5% of their revenue on average last year, according to the Association of Certified Fraud Examiners’ Occupational Fraud 2024: A Report to the Nations. Let’s review its three basic categories.
Misappropriating assets
The first category is asset misappropriation. It comprises theft or misuse of any business asset, but related schemes often involve cash. These types of scams are the most common type of occupational fraud, though they’re typically less costly than crimes committed under the other two categories.
One classic example is the “ghost” employee ploy, where a staff member with payroll access channels funds to a nonexistent worker. Naturally, those funds end up in the real employee’s pocket.
There are plenty of others. Asset misappropriation has long involved check tampering, whereby an employee steals, forges or alters company checks to reap ill-gotten financial rewards. Now that midsize and larger businesses rely more on electronic transactions, these companies are relatively less susceptible to check schemes. However, many small companies are still at risk.
If you run a cash-intensive business, be on the lookout for dishonest workers skimming funds before they’re recorded. And if your company maintains inventory or supplies, safeguard these carefully to avoid theft.
Engaging in corrupt activities
The second category of occupational fraud is corruption. Dishonest employees in positions of influence may commit crimes for personal gain and the company’s loss. These types of schemes are rarely simple and may go on for months — or even years — without anyone noticing.
For instance, a corrupt staffer may work with a vendor rep to inflate prices on the vendor’s goods and services. The two then split the difference when the business pays the bill. Collusion like this can hurt your company’s financial performance and business reputation. Leadership teams that fail to prevent such schemes risk losing the confidence and support of lenders and investors.
Don’t ignore the possibility of kickback schemes either. Here, a person of influence in the company uses a vendor or other provider, not because they’re the best choice, but because the employee involved gets a personal benefit. Examples might include cash, a valuable gift or free services.
Falsifying financial statements
The third category is financial statement fraud. In these schemes, perpetrators falsify financial statements to either hide poor performance or commit outright theft. On the upside, this category is generally the least prevalent of the three. The downside? It’s often the costliest — with such crimes costing companies many hundreds of thousands of dollars on average.
One example to watch out for is inflated revenue. A manager, perhaps angling for a promotion or fearful of termination, records sales that never actually occurred to make the business appear more profitable. On a similar tack, a dishonest employee may hide or delay recording legitimate expenses or debts to make financial results look stronger.
Fraudulent manipulation of financial statements can be particularly dangerous. These crimes are often sophisticated, hard to detect and damaging to a company’s reputation at the highest levels.
Common thread
As you can see, occupational fraud can take many forms. But the common thread is the financial and reputational damage to affected businesses. And the threat level is often higher for smaller companies because they may have fewer resources to fight back. Let your Rudler, PSC advisor help you spot vulnerabilities in your operations, strengthen internal controls, and devise tailored fraud prevention and detection strategies.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Jenna Polston, Tax Department Administrative Assistant and Kaitlyn Evans, CPA.
If you would like to discuss your particular situation, contact Jenna or Kaitlyn at 859-331-1717.
As part of Rudler, PSC's commitment to true proactive client partnerships, we have encouraged our professionals to specialize in their areas of interest, providing clients with specialized knowledge and strategic relationships. Be sure to receive future Rudler Reviews for advice from our experts, sign up today !