The vast majority of annual losses that result from criminal activity in business and government entities are not caused by shoplifters or burglars in the United States. It is employee-thieves disguised in many forms who commit their crimes, which are, unfortunately, often discovered long after their various schemes begin. (We recently worked a case involving a medical clinic with 120 employees, 27% of which possessed a significant criminal history. The average for a company this size is 2- 3 %. In next week’s Part II of this series on employee theft, we’ll go more in depth with the details of this particular entity’s setup, causal factors and how we resolved the issue.)
Their many schemes are identified as occupational fraud by the Association of Certified Fraud Examiners, or ACFE.
Based upon the Gross World Product, the ACFE estimates that global losses from fraud may be $3.5 trillion. No entity is exempt and just about any employee can be engaged in some form of fraudulent activity and theft, be it office supplies, time, gasoline, telephone calls, cash, assets, food, liquor, artwork hanging on the walls, bed sheets, pillows and blankets, dishes, narcotics, credit cards, checks, information, and whatever else is available for the taking. They pad time sheets and expense reports, submit false medical claims, forge mortgage documents, submit phony bills to clients and customers, and just about anything else that you can imagine.
The businesses or entities most at risk
The businesses most at risk to internal fraud and theft, in the order of losses from highest to lowest, are banking and financial services, government, and public administration, and the manufacturing sectors. Small employers (fewer than 100 workers) are more commonly victimized than larger companies because they usually cannot afford strong anti-fraud measures. They’re also often not in a financial position to absorb losses and keep their business going as a viable entity.
Shocking statistics about losses
Businesses, globally, experience losses of about 5% a year from schemes committed by employees. The average loss was about $400,000, and in one-fifth of businesses that were surveyed in the ACFE study, the loss was at least $1,000,000. In the least costly forms of fraud, the cost to business was about $120,000.
Many cases will never be discovered in time and therefore, the actual amount of the losses may never be known . In cases that are referred to law enforcement, 55% of the offenders plead guilty, 19% of prosecutions are declined, and 16% are convicted at trial.
Profile of an employee-thief
ACFE reports analyzed a number of factors to identify the thieving employee: gender, personal credit history, education, criminal history, employment history, job duties and responsibilities, lifestyles and other influences in the employee’s life and concluded that long-term employees are the most suspect because of their knowledge of the inner workings of the entity and understanding of the controls that they must circumvent.
As a general rule, occupational fraud is carried on by men and women who fit into the following profile:
- College educated employees are most likely to steal, those with high school degrees are second, and those with either graduate degrees or some college are least likely to commit criminal thefts;
- Most who engage in fraud are first time offenders within the criminal justice system. The vast majority (87%) have never been charged or convicted of a fraud related offense, and almost the same percentage (84%) have never been punished or terminated by an employer for fraudulent conduct. Only five percent had prior offenses or had been charged but not convicted;
- Two-thirds of the crimes are committed by men 31 to 60 years old. The highest concentration is between the ages of 36 and 45;
- More than 75% of frauds occur in six departments: accounting, operations, sales, executive upper management, customer service, and purchasing;
- The more authority an employee has, the larger the losses will be, with a median value by owner/executives of $573,000;
- Losses caused by managers averaged $180,000 and by employees, $60,000;
- The longevity of employment is related to the amount of losses. This is because the longer a person is employed the more he or she is trusted and is subjected to less scrutiny; and they have a better understanding of the system. Consider Bernard Madoff and the number of years he was able to defraud investors;
- Employees who commit fraud during their first year (fewer than 6%) will cause an average of $25,000 in losses. Almost half the losses (42%) are caused by employees who have worked from one to five years. Those that worked for the company more than ten years caused a median loss of $229,000.
Now that you understand the make-up of a company thief, next week we instruct on loss prevention.
BNI Operatives: Situationally aware.
As always, stay safe.