What is Occupational Fraud?

Per the Association of Certified Fraud Examiners, occupational fraud is defined as, “The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” Any time an employee, manager, or executive commits fraud against their employer, this would be classified as an occupational fraud.

Occupational fraud can be broken out in to the following three categories:

  • Financial Statement Fraud – A scheme in which an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports. Per the ACFE 2016 Report to the Nations on Occupational Fraud and Abuse, financial statement fraud occurs in less than ten percent of case studies, but caused a median loss of $975,000. Financial statement fraud is typically identified as Net Worth or Net Income overstatements and understatements.
  • Corruption – A scheme in which an employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit. Corruption cases accounted for approximately 35% of the cases involved in the Report to the Nations, and caused a median loss of $200,000. Corruption can be broken out in to conflicts of interest, bribery, illegal gratuities, and economic extortion.
  • Asset Misappropriation – A scheme in which an employee steals or misuses the employing organization’s resources. Asset misappropriation is the most common form of occupational fraud at 83% of the case studies in the Report to the Nations. However these schemes had the lowest median loss of $125,000. Asset misappropriations are typically thefts of cash or inventory and other assets.

According to the Report to the Nations, a typical organization loses five percent of revenue a year as a result of fraud, and the median loss for all cases in the study was $150,000. The total losses accounted for in the cases reviewed for the Report to the Nations exceeded $6.3 billion.

Regional Examples

Occupational fraud affects all businesses on a global scale. The Report to the Nations analyzed 2,410 cases of occupational fraud that occurred in 114 different countries. In the first two months of 2018, the following instances of occupational fraud have either occurred or have been prosecuted in the New Jersey, New York, and Pennsylvania area:

  • George Dfouni of Wayne, NJ admitted to stealing more than $13 million in portions of lease payments from a company for which he was employed as the Chief Operating Officer. 
  • Gina Neri of North Arlington, NJ, a bookkeeper for Kearny Township’s Board of Education, stole nearly $200,000 from the district. 
  • John Seckel of Newtown, PA, the Chief Executive Officer of Seckel Capital, LLC, filed forged financial statements with the Department of Housing and Urban Development and falsely claimed on four occasions that he had met the net worth requirements to be approved as an FHA lender.
  • Eleven Jersey City, NJ police officers have plead guilty to taking corrupt payments related to off-duty jobs for which they did not work and taking bribes to approve fictitious timesheets.
  • Joseph Percoco, who served as Andrew Cuomo’s Executive Deputy Secretary, is facing charges that he pocketed more than $300,000 in bribes.
  • Ray Ventrone, the business manager of Boilermakers Local 154 in Pennsylvania, stole over $1.5 million from the union, by authorizing payments to various retailers like Best Buy, the Apple Store, and Louis Vuitton, which were not for the benefit of the union. 
  • David Eldredge, the Chief Financial Officer of the Carmel, NY based Children’s Bible Fellowship was arrested for stealing approximately $100,000 from the charity. 
  • Cortney Brucee of Mount Holly, NJ was accused of stealing approximately $109,000 from her employer, a hardware supply company. She allegedly deposited customer payments in to her own personal bank account. 
  • Dorothy Murphy, a supervisor with the New Jersey Department of Children and Families, plead guilty to obtaining almost $11,000 in unearned overtime pay. She utilized the credentials of another more senior colleague and altered her overtime hours and approved her own pay. 

These stories fall in line with the ACFE’s findings that a majority of occupational fraud cases involve some form of asset misappropriation. In New Jersey, per the general theft statute, the embezzlement of money or property worth more than $75,000 is a second degree crime, which can lead to a prison sentence of up to ten years.

Prevention

Steps can be taken to prevent occupational fraud from occurring in your business. The three most common organizational weaknesses that contributed to occupational frauds were:

  • An overall lack of internal controls 
  • An override of existing internal controls 
  • A lack of management review. 

The implementation of internal controls in order to create a segregation of duties is extremely important. Per the Report to the Nations, a business with established internal controls generally had lower fraud losses and detected fraud quicker than those organizations without any controls.

Not only does the implementation of internal controls help to prevent fraud, but the visibility of controls among employees can act as a fraud deterrent. Employees should be aware of the specific consequences to any wrongdoing and know the chain of command in regard to reporting any perceived unethical behavior. Maintaining a code of conduct and providing fraud training to employees is a control that can and should be implemented across all businesses. Establishing a zero tolerance culture as it relates to fraud is something that even the smallest of businesses can implement.  

Occupational fraud can have a serious impact on not only business revenues, but culture and reputation as well. Through the implementation of proper controls, testing of controls, creating an anti-fraud culture by setting the tone at the top, and providing anti-fraud training for employees, businesses and other organizations will be taking steps to minimize their risk as it relates to occupational fraud.