Society provides the social structure on which the business builds its operations and establishes its market. Society provides the social capital necessary for business success – location of a business, its employees, vendors, customers and raw materials. Equally important among the social capital are social traits like peace, conviviality, morals and other enablers of social stability. The availability and quality of social capital in a given geography, per time, explains why some locations boast of more industrial presence while some other locations are bereft of such industrial presence. Investors and business owners gravitate towards geographies with higher concentration of social capital. Any impairment to the social capital base would equally impair the ability of the business in meeting her social and economic responsibilities.

Globally today, the scale and quantum of business losses occasioned by fraud suggest a severe impairment to the global social capital base. Moral deficit in society is threatening the entire social structure on which businesses thrive; the well-being of the majority is traded for the immediate gain of a minority. But society provides the human resources deployed by business; thus, the moral deficit in society transcends to businesses thereby creating economic deficits. From the developed to the developing economies; from private to public institutions; from for-profit to non-profit organizations; from large corporates to SMEs, the story is the same: organizations are bleeding heavily due to fraud infestation. The Black’s Law dictionary defines fraud as a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment. Whereas fraud by political actors makes news headlines across the world, a recent study by the Association of Certified Fraud Examiners (ACFE) has shown that corporate actors are at the same level of malfeasance. Whilst the latter is least reported, business organizations are losing value due to Occupational Fraud. ACFE warns that organizations globally lose about 5% of their revenue to occupational fraud (estimated a $5 Trillion in 2024). For proper contest, Occupational Fraud refers to intentional deception or misrepresentation, by employees, management, owners, members, volunteers, vendors, customers, and other stakeholders in order to obtain private gain from a business. It is also referred to as ‘White-Collar Fraud’.  As society grows in knowledge, occupational fraud schemes continue to grow in depth, form and sophistication. The fact that occupational fraud remains so widespread and so costly is a stark reminder of the urgent need for organizations to grow defense mechanisms to protect their hard-earned resources. Key to surviving the scourge includes an intentional effort towards understanding a lot more about occupational fraud: how much it costs, how it is committed, who commits it, and how it can be prevented and detected.

From Known to Nuances

Over the years, there has been concerted attention and fervent advocacy on the social responsibility of business to society; interestingly, we are at the crossroad where the business in turn will begin to demand social responsibility from society. At the moment, businesses are hurting and bleeding from the multi-variant attacks of occupational fraud. In the past, occupational fraud was majorly viewed and classified from the five major accounting cycles:

1. Sales and Collections/Receipts: This is the point where the organization collects proceeds from goods sold, services rendered and other benefits due. The propensity for fraud to occur at this point is very high and most likely. Outright defalcation of physical cash, under-statement of sales, teeming and lading have been the most prevalent fraud schemes known to dominate at this point. However, recent observations have revealed nuances enabled by technology eg. account-cloning, parallel accounts, use of unauthorized POS terminals, etc. Technology has been identified as the leading enabler of modern-day occupational fraud at this stage in the accounting cycle.

2. Purchases and Payments (Disbursements): Invoices and payment vouchers find their way to the payment counter even when no value was received by the business. Collusion by those charged with the responsibility of protecting the business has made this possible. Even the traditional three-way – matching of Invoice, Purchase Order and GRN is failing as collusion ensures that GRNs are raised to authenticate fictitious POs and invoices when no actual inventory was received. There are also external collaborations with vendors wherein items purchased are over-stated to ensure the vendor returns the difference to the employees involved at the detriment of the business. Some of the nuances include insider-abuse where procurement officers and senior executives serve as vendors under cover by registering companies with identities not directly traceable to them; thus, they raise POs, influence prices and secure payment approvals, all for their ultimate benefit.  

3. Personnel and Payroll: ‘Ghost Workers’ is a regular fraud scheme that enables perpetrators to gain undue benefits by inflating employee headcount on payroll. Again, technology is also an enabler here as perpetrators can receive the proceeds of their crime through bank account which is easier than the old system where physical appearance and sign-off were required to retrieve the proceeds.

4. Inventory and Warehousing: Stealing, unauthorized use, use of dummy stock; these have been prevalent in inventory – based fraud schemes wherein empty cartons are stacked to justify falsified inventory figures or items of inventory are physically taken away by those expected to keep custody of inventory. There are also cases of unauthorized consumption of edible inventory, especially in retail organizations. A striking nuance here is the ability of perpetrators to beat the technology infrastructure like CCTV cameras by either turning off the power source momentarily or veiling the camera for the period of the onslaught.

5. Monthly Reconciliations and Reporting: Most fraud schemes continue undetected because of the complicity of those charged with responsibility of reconciliation and reporting. All the fraud committed in the first four stages are perfected and concealed at this stage. Reconciliations are intended to provide assurance on completeness of records and the flow of resources; however, it can be used in fraud schemes to rationalize and regularize the fraud committed in the earlier stages: stock losses are rationalized as shrinkage; missing cash is coded as cash-in-transit, sales suppression is hidden under frivolous discounts. The capacity of those involved in reconciliation and reporting affords them leverage to also initiate fraud through willful material misstatements in the financial statement. Financial statement fraud, though less prevalent, is the most impacting in terms of the amounts involved. Large corporations have been brought down by financial statement fraud crafted in the back office with little or no physical movement of goods required, making it the deadliest among known occupational fraud schemes.

Counting the cost

Having examined the incidence of occupational fraud through the accounting stages, we begin to assess the true cost of occupational fraud both to the victims (organizations) and the society at large. A more common headline in recent times has been Investors losing their investments in start ups that go under when the founders divert funds to other private uses. Until now, we have always had repeated cases of corporate bankruptcies occasioned by fraud by those charged with governance. In each of these scenarios, wealth gathered is lost, jobs are lost, households’ income sources gone, once -employed persons become unemployed; sometimes the health condition of the affected persons declines, even loss of life follows in some cases. Overall productivity of society is affected negatively with each case of occupational fraud as the ability of the organizations to grow, expand and continue into the foreseeable future is impeded: cost of operations continues to swell and profit margins thin-out continuously.

The demography of occupational fraud is as multi-faceted as the fraud schemes. There is no age limitation, the old and young are equally culpable. Literate and non-literate persons are involved; but studies have shown that the values involved and the level of sophistication seem to aggravate with the level of education of the perpetrators. In terms of organizational hierarchy, low level personnel are as culpable as senior executives, the only difference is the size of the cache. At this point, it is instructive for business owners, investors, shareholders, trustees to take careful steps to guard their businesses from the evil of occupational fraud.

Safeguards to Occupational Fraud

Whilst occupational fraud continues to wreak havoc, it behooves organizations and business owners to commit adequate resources in combating this menace. There is no silver bullet that can end the onslaught unleashed by the perpetrators of occupational fraud, however, safeguards exist:

  • Drop the denial: The first safeguard is coming out of the denial coven where most organizations are lounging, believing their system is safe and foul proof. Start with a simple vulnerability test around your operations and reporting to highlight high risk areas; review and test your controls regularly.
  • Building a strong system of internal controls: This includes establishing controls and disciplines over controls. Simple controls like unscheduled cash counts, transaction call-overs and daily reconciliations can help curb occupational fraud. ACFE study revealed that 14% of fraud detection is credited to the existence of an internal audit/control system.
  • Whistleblowing: Whilst fraud schemes may not be known to management or the business owners, employees, customers, vendors, and other external parties usually are in the know but may not have the appropriate protection and comfort to report the issue. Having an independently controlled Whistleblower system has helped a lot of victims detect fraud schemes earlier. Employees are more comfortable reporting through an independent channel than reporting through existing reporting lines within the organization for fear of victimization.
  • Employee Profiling: Background checks for prospective employees can help in identifying risky intakes who may eventually corrupt the system.
  • Consider the ‘Cockroach Theory’: Wherever you see a Cockroach, there is a higher likelihood of having yet another Cockroach in that environment. Thus, no case of occupational fraud should be treated in isolation: if a case of missing inventory is established, there could be a case of false GRN in that same system.
  • Leverage technology: As much as possible, automate manual processes with proper segregation of duties. Avoid the temptation of Warehouse teams keeping an excel sheet for inventory which is sometimes considered more accurate than the ERP. In terms of collection, only patronize Fintech solutions with proper end-to-end controls; and seek customization as much as is practicable.

Remember, there are no hard and fast rules to curb occupational fraud; no class or size of organization has immunity against this malaise; every employee can become susceptible to ‘white collar fraud’, either as a principal actor or an accessory to crime; occupational fraud schemes are evolving as knowledge and technology are also evolving. Thus, staying safe requires circumspection, self-awareness, proactiveness and strong discipline.

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