Occupational Fraud: What Is It, and How Can You Prevent It?

Managing fraud risk is always important, but it becomes critical in times of economic uncertainty. Fraudulent activity rises during recessions and economic downturns for a variety of reasons.

Layoffs are more common, which leaves internal controls systems lacking. This creates more opportunities for fraud.
Employees and companies are financially strapped, which makes it easier to rationalize theft or to the help the business survive.
Consumers are more selective with their spending, which puts pressure on management to show high performance numbers or on employees to maintain a certain lifestyle

If you haven’t reviewed your fraud controls in a few years, now is a great time. Not only has the economy put you at greater risk, but the methods and tactics for committing fraud are always changing. It’s a great time to shore up weaknesses in your control environment so that you can (1) prevent fraud from occurring, and (2) limit your exposure if fraud does occur.

What is occupational fraud?

Occupational fraud is fraud committed against an organization. The ACFE estimates that organizations lose 5% of revenues each year due to fraud. There are many different schemes that fall under this umbrella.

Asset Misappropriation

Asset misappropriation is when someone uses a company’s assets for personal gain without authorization. This includes cash, but it can also include non-cash assets.

Cash Misappropriation: Employees can steal cash or funds from the company in many ways:

Skimming cash from sales
Tampering with checks
Adjusting accounts receivable and pocketing the difference
Creating fake employees to collect additional payroll
Falsifying timesheets
Inflating expense reports
Using company funds for personal purchases
Colluding with vendors to overcharge for goods or services
Diverting payments to fictitious vendors

Non-Cash Asset Misappropriation: Employees can steal or misuse tangible and/or intangible property that belongs to the company. Common methods of non-cash asset misappropriation are:

Stealing inventory for resale
Using equipment for personal use
Pilfering office supplies
Submitting a false claim for lost equipment
Selling trade secrets or other intellectual property

Corruption

Corruption is a catch-all term for fraud that involves the abuse of power or authority for personal gain. Common corruption tactics are:

Conflicts of interest: When a person of influence makes a decision for the business that benefits them as an individual.
Example: Hiring your nephew even if he wasn’t the best one for the job (nepotism).
Bribery: Agreeing to accept something of value (money, gifts, favors) in exchange for a favor or payout.
Example: A medical device company offers kickbacks to encourage surgeons to use their devices.
Illegal gratuities: Payment offered to someone as a reward for acting a specific way without prior agreement to do so.
Example: Accepting a free trip from a vendor once you’ve offered them your business.
Extortion: Threatening, blackmailing, or intimidating someone else to gain something for yourself.
Example: Paying off an employee who is threatening to reveal trade secrets.

Financial Statement Fraud

Financial statement fraud is the intentional misrepresentation of a company’s financial performance. It’s perpetrated with the goal of misleading investors, creditors, business partners, or other stakeholders.

Financial statement fraud is nearly always performed by senior management within a company. This includes the controller or CFO but could be any executive or manager that understands accounting principles and has access to the financials. These individuals often falsify entries to overstate revenues or understate expenses, but they might also:

Omit certain facts from the disclosures
Overvalue assets or undervalue liabilities
Change the timing of when revenue is recognized
Manipulate reserves accounts
Expense items that should be capitalized
Enter into a non-arm’s length transaction with a complicit third party

Even though financial statement frauds are the least common, they are by far the most costly. According to the Association of Certified Fraud Examiners, in 2024, financial statement fraud accounted for only 5% of all fraud schemes, but the median loss was a whopping $766,000. Asset misappropriation schemes accounted for 89% of cases but had a median loss of only $120,000.

How is fraud typically concealed?

Fraudsters come up with all types of ways to conceal their schemes. According to a 2024 report from the Association of Certified Fraud Examiners, these are the top four most common techniques:

Creating fraudulent physical documents
Altering physical documents
Creating fraudulent electronic documents or files
Altering electronic documents or files

As you can see, fraud occurs whether there is a paper trail or an electronic trail, so every business is at risk, even those that employ modern technology in their back office.

How is fraud typically detected?

By far, the most common detection method of fraud schemes is by tips from employees, customers, or vendors. 43% of all fraud schemes are discovered this way. But internal audits and management review together account for over a quarter of all initial detections.

What does this information tell us?

Hotlines are important. You want your employees to have a safe way to notify management if they suspect that there is fraud.
Training is important. Your employees and management need to know what fraud looks like so they can identify it when it occurs.
Internal controls are important. Your internal controls need to be complete, yes, but you also need to investigate any time those controls are overridden. And regular testing and review of controls helps understand vulnerabilities.

These solutions may not eliminate the occurrence of fraud altogether, but they will make it much less likely to occur. And if fraud does occur, you’ll be able to catch it much faster, minimizing the financial impact.

If you want to talk to an advisor about fraud prevention and detection techniques, reach out to our LaPorte Forensics professionals. Our consultants have years of experience with fraud, including tracing assets, quantifying losses, building fraud detection techniques, and designing internal controls to address fraud risk. We’d love to help you reduce your fraud risk.