Occupational Fraud and Abuse

By Ufuk Doğruer, Financial Axis Independent Audit & Consulting Inc

What is ‘Occupational Fraud’? ‘Occupational fraud’ occurs if the top management, employees or third parties are deliberately engaged in fraudulent behaviours in order to provide benefits. The fraudulent forms of movement aimed at providing unfair gains can be realised in many different forms.

Some of these movements can be listed as follows: theft, check and payment tampering, fraudulent payments, bribery, illegal gratuities, economic extortion, billing schemes, payroll schemes and financial statement frauds.

The following graph ‘The Fraud Triangle’ is used to describe the factors that lead to the above-mentioned fraudulent behaviours and to search for red flags in each of these areas. The tip points of the fraud triangle usually consist of three factors observed for the execution of the fraudulent activity:

Pressure: This is the point at which the perpetrator encourages himself to make the fraud. For example, financial diffculties.

Opportunity: The ineffciency of the internal control system can lead to the creation of the appropriate environment for fraud and corruption. The fraudster sees the internal control weakness and starts to abuse it.

Rationalisation: The internal reason created by the fraudster. For example, ‘I will just borrow this; I will pay it back later; the boss is earning more than me.’

International Dimensions of Occupational Fraud and Abuse

The 2018 version of the ‘Global Study on Occupational Fraud and Abuse’ prepared by the Association of Certified Fraud Examiners (ACFE), which contains up-todate data, has been released.

According to the report, which provides up-to-date and important information on fraud and abuse, there are certain categories that illustrate how occupation fraud and abuse is done. The report presents these categories under the heading ‘Occupational Fraud and Abuse Classification System’ or, in other words, ‘The Fraud Tree’.

In the report, according to the data obtained from 125 countries, 23 different sectors and 2,690 fraud and abuse cases, 89% of fraud and abuse cases are realised by the ‘asset misappropriation’ method. Although asset misappropriation is the most common form of fraud and abuse, embezzlement with an average loss of USD 114.000 is the least common loss method for victim organisations.

On the other hand, ‘corruption’ constitutes 38% of the cases examined in the report as the second most common method of fraud and abuse. The corruption case results in higher losses, although corruption is rarely encountered compared to asset misappropriation. The average amount of loss that occurred in victim organisations is USD 250,000.

The least frequently encountered ‘financial statement frauds’ method is causing the victim organisation to suffer the biggest losses. It accounts for 10% of all cases and leads to an average loss of USD 800,000.

‘Behavioural red flags’ of perpetrators

As Financial Axis; according to the information we obtain from the companies for whom we conduct fraud audits, the abusers indicate the following ‘behavioural red flags’ regarding fraud and abuse.

  • Living beyond means;
  • Financial diffculties;
  • Unusually close association with vendor/customer;
  • Control issues, unwillingness to share duties;
  • Divorce/family problems;
  • ‘Wheeler-dealer’ attitude;
  • Irritability, suspiciousness, or defensiveness;
  • Addiction problems;
  • Complaining about inadequate pay;
  • Social isolation;
  • Complaining about lack of authority.

Steps to be taken by organisations in the prevention of occupational fraud and abuse

‘Internal control deficiencies’ are fundamental to the creation of fraud and abuse. Some of the steps that organisations can take to address these shortcomings are as follows:

  • Internal audit department;
  • Code of conduct;
  • External audit of financial statements;
  • Independent audit committee;
  • Hotline;
  • Proactive data monitoring/analysis;
  • Account reconciliation;
  • Fraud training for managers/executives and employees;
  • Surprise audits;
  • Job rotation/mandatory vacation;
  • Rewards for whistle-blowers.


Ufuk Doğruer

Ufuk Doğruer

Financial Axis Independent Audit & Consulting Inc, Ankara, Turkey
T: +90 312 428 1 444
E: This email address is being protected from spambots. You need JavaScript enabled to view it. ; W: www.finansaleksen.com.tr

Published: September 2018 l Photo: ©contrastwerkstatt - stock.adobe.com

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