Workplace fraud costs more than you realize

Fraud has a higher cost than most people realize. March is fraud prevention month in Canada and a good time to review the losses from, and reasons for, workplace fraud.
Fraud occurs when someone uses deceit, falsehood and/or any other fraudulent means to steal your money, your property or some other valuable. With technology and globalization, both the incidence and innovativeness of fraud has been growing. Some of the more common fraud includes requesting upfront fees for a product or service that doesn't get delivered, false billing, counterfeit cheques, writing cheques when there are insufficient funds and/or misrepresenting the financial activities of a company.
Not long ago, for instance, police uncovered a major mortgage fraud where people deliberately used false, misleading and fraudulent information to secure a mortgage. Last year saw an Alberta man plead guilty to selling counterfeit cancer drugs on the Internet. Car insurance schemes have also been discovered and of course, everyone is familiar with incidents of personal identity theft and falsifying a resumé.
Employee theft or occupational fraud, as it is also known, occurs when an individual fraudulently acquires company assets such as cash, supplies or equipment.

For instance, money orders and expense claims can be altered and/or padded, petty cash can simply disappear, multiple office supplies and various company products drift homeward and sick leave benefits are abused. Sales employees have been known to sell a product and keep the cash, sell products to clients who were not on the company sales records and/or direct payment into their own bank accounts.

Accountants who are dipping their fingers into the till, so to speak, have been known to divert or misappropriate money from office operations into their own bank account or issue cheques to fictitious cost centres or even to a ghost employee, while the money is actually directed into their own bank account. Others have been caught using company funds to pay for personal items such as a cellphone.

According to a recent study commissioned by the Association of Certified Fraud Examiners, approximately 39 per cent of fraud occurs in privately owned companies, while the public sector experiences 26 per cent of fraud. Smaller organizations with fewer than 100 employees accounted for almost 43 per cent of those experiencing fraud losses of $150,000. This translates into a five-per-cent loss for every $100 of sales.
According to the study, most fraud occurs as a result of three types of theft. Misappropriation or misuse of assets includes such schemes as skimming sales, payroll fraud, padding expenses or fraudulent billing. Pure corruption leads to bribes, illegal gratuities, conflict of interest or engaging in self-dealing transactions. In the third type, people will deliberately falsify financial statements, record fictitious sales or hide liabilities and expenses.

There are a number of interesting details about the perpetrators. For instance, employees steal more often than managers, but the loss from managerial theft is much larger. Theft by owners and/or business executives, as can be expected, is much larger. More men than women engage in occupational fraud and these individuals are typically found in sales, accounting departments and/or in upper management. Finally, those individuals involved in theft are typically longer term employees who know the internal systems well.

So, how is an incident of employee theft typically discovered? A 2008 Statistics Canada study, Fraud Against businesses in Canada: Results from a National Survey, indicates that most fraud comes to light through employee and/or customer tips rather than through the internal controls an organization has put in place. Interestingly enough, many instances of fraud are never even reported to police. The incidents may be considered too minor, the loss was recovered, and/or the resources required to pursue criminal charges may outweigh the losses. Still others indicate they didn't want to create negative publicity.
Those thefts reported to police and criminally prosecuted typically involved higher losses; however, when these steps were taken, at least 50 per cent of the perpetrators pled guilty.

It is unfortunate that employee theft takes place, but the real question is why do employees steal? According to U.S. fraud expert Terry Shulman, author of Biting the Hand that Feeds: the Employee Theft Epidemic, people who steal at work aren't really professional thieves or wholly dishonest, they often steal as a result of some type of disgruntlement, an addiction and/or compulsion. Still others justify theft because they feel they are jealous of an owner's lifestyle and success, they may feel they are a victim or they are angry and feel unappreciated.

This perception of people who steal was echoed by Det. Sgt. Sandra Martin, an officer in commercial crime with our local police force, who says that many people who steal feel a sense of entitlement. For instance, one individual her office had investigated had been denied a raise and subsequently started diverting company cash to her own bank account as her own form of compensation. As well, Martin suggests that most people who engage in theft believe they won't get caught if they steal money in small increments. Then, when an arrest does occur, they are shocked at how much money they have stolen.

At the same time, we know there are indeed employees who simply lack any sense of ethics and will steal from their employer without feelings of guilt or concern. These employees don't even think about having to justify their behaviour, they just steal. Unfortunately, as well, there are a growing number of employees who steal to feed an addiction such as alcohol or gambling and these are difficult situations to deal with.

What can be done about employee theft? While the first answer is often guidance toward improving internal controls, keep in mind that studies are showing that most fraud comes to light through employee and/or customer tips. This suggests to me that the best means of fraud prevention is to create a positive organizational culture where there are strong and trusting employee/employer relationships.

Source: Det. Sgt. Sandra Martin, City of Winnipeg Police Service; Fraud Against businesses in Canada: Results from a National survey, Andrea Taylor-Butts and Samuel Perreault, Statistics Canada, 2007/2008; Detecting Occupational Fraud in Canada: A Study of its Victims and Perpetrators, Association of Certified Fraud Examiners and Dr. Peltier-Rivest of Concordia University, Montreal

March is Fraud Prevention Month

The RCMP believes fraud in Canada is approaching the size and scope of the drug trade.

Research shows that fraud is the crime that affects the most Canadians, said the head of the RCMP's major fraud unit.

RCMP Insp. Kerry Petryshyn said mass marketing fraud alone accounts for nearly $10 billion in fraud losses every year.

"That's over a million victims," he said.

Total losses from the crime are actually $30 billion a year, police estimate.

"Which is pretty close to the drug industry here in Canada, however a lot more victims," he said.

Types of fraud include email fraud, spam and compromised credit cards.

March is fraud prevention month and the RCMP is taking part in a two-day conference in Ottawa called Preventing Fraud in the Digital Age.

This month RCMP wants Canadians to do more to protect themselves.

Petryshyn said that while the internet is a fertile place for fraud to occur, it's also a powerful tool to gather cautionary tales.

"If you query yourself the name or the information and the product you're buying, the company you're dealing with or whatever you have, chances are pretty good if someone's been ripped off they're written about it and you can see that and then use that information," he said.