United States organizations lose 7 percent of their annual revenues to fraud,
according to a study by the Association of Certified Fraud Examiners, Inc.
(ACFE).* The report goes on to state that
“applied to the estimated 2008 U.S. gross
domestic product, this 7 percent figure
would translate to approximately $994 billion in fraud losses.”
“Organizations can cut these losses by
instituting good internal controls and
detecting fraud at its earliest stages,” says
John Schoendorf, partner and Litigation
Support leader at Berenfeld Spritzer
Shechter & Sheer LLP. “The study highlights how important it is for organizations
to develop a system for anonymous fraud
reporting. It is also important to have internal auditing procedures and to conduct
surprise audits occasionally. Training on
fraud detection and avoidance should be
provided to employees and managers.”
Smart Business asked Schoendorf for his
insight into detecting occupational fraud
and steps to take when it’s discovered.
What are the common types of fraud?
The most prevalent is asset misappropriation, which includes fraudulent invoicing,
payroll fraud and skimming revenues.
According to the ACFE, this occurred in
88.7 percent of cases with a median loss of
$150,000. Corruption, including accepting
or paying a bribe and engaging in business
transactions where there is an undisclosed
conflict of interest, occurred in 27.4 percent
of the cases. The median loss in these cases
was $375,000. Financial statement fraud
occurred in 10.3 percent of the cases but
had a median loss of $2 million. Financial
statement fraud includes booking fictitious
sales and recording expenses in the wrong
period. Percentages exceed 100 percent
because some cases involve schemes that
fall into more than one category.
At what management level is fraud most
According to the ACFE study, 29 percent
of the fraud took place in the accounting
department. Slightly more than 18 percent
of the cases were committed by upper-level
management or executive-level employees.
Seventeen percent of the cases involved the
Fraud quite often occurs when trusted
employees are financially pressured by
changing personal circumstances. They see
an opportunity to commit fraud, then justify their behavior by rationalizing it away.
Look for common danger signals, such as
medical issues within an employee’s family,
finding excuses for not taking a vacation or
living beyond his or her means. In short, get
to know your employees and recognize
What steps should be taken to prevent occupational fraud?
Most fraud is detected accidentally or by
tips from employees. Customers and vendors may also provide information that can
lead to fraud detection. Because only a
small fraction (7 percent in the study) of
the perpetrators had convictions prior to
committing their frauds, background
checks aren’t as useful as many think, at
least in this area. The most effective deterrent is open communication. Make it easy
for employees to provide tips, especially
anonymously. Develop a system that
encourages reporting actions that might
indicate fraud. Tip hot lines can be very
Another good tool is fraud training. Inform
employees of what to watch for. Conducting
surprise audits can prevent or limit losses.
Involve as many people as possible in
processes. For example, the person cutting
checks should be different from the one
approving invoices, and the person approving invoices should not be the one issuing
purchase orders or checking in shipments.
The more people involved, the less chance
there is for fraud. In small businesses,
where it might be difficult to segregate
duties, one tool would be having the bank
statement sent to the owner’s home to allow
independent comparison to the records.
What should be done if fraud is discovered or
The first thing is to contact your professional advisers, attorney and certified public accountant. You need to make sure that
all the proper steps are taken to document
any losses and their causes in ways that
will hold up in court if that becomes necessary. In fact, you should proceed as
though a court proceeding is a certainty.
You can’t undo procedures that might prevent valuable evidence from being admissible. You can’t make accusations without
adequate proof. Your attorney can help
assure discovery is conducted properly.
Your accountant should refer you to a
forensic accounting specialist, preferably a
certified fraud examiner who has the training and experience to work with your
attorney and the authorities to assure the
best outcome for recouping any losses you
*Statistics in this article are credited to the
ACFE Report to the Nation on Occupational
Fraud & Abuse, ©2008 by the Association of
Certified Fraud Examiners, Inc.
JOHN SCHOENDORF is a partner in the Litigation Support practice of Berenfeld Spritzer Shechter & Sheer LLP. He specializes in forensic accounting, fraud examinations, commercial and civil damages, bankruptcy and restructuring. Reach him at (305) 669-7051 or