Introduction
There is no clear definition of work place fraud. It can be described as activities involving dishonesty and deception, which can drain value from a business directly or indirectly. It does not only involve distortion of financial statements, but it can range from exaggeration of minor expenses, to international fraud.
Today work place fraud is a serious concern to all organizations. Organizations are supposed to engage professionals to deal with this issue as a part of their functional responsibilities. According to the recent survey, about half of the companies reported being victims of work place fraud.
A recent survey conducted by KPMG shows that 89% of fraudsters are employees of the organization. About 86% of the frauds committed involve senior management and board members of a company. Around 91% of fraudsters do not stop on a single transaction but commit multiple frauds.
The average direct cost of work place fraud is around 2 billion dollars (Kelly, 2010). This does not include other costs like the cost of trying to prevent fraud, cost of responding to fraud and the loss of management time. A survey conducted by Ernst and Young indicate that employers in America lose about 20% of every dollar earned to workforce fraud. Women are more likely to report cases of fraud as compared to men.
According to the survey, 80% of frauds are committed by staff in one of the following departments: accounting, operations, executive management, sales or customer care departments. Accounting department has the most cases of frauds. The most common fraud in this department is check tampering and billing fraud. There are various factors that cause an employee to commit fraud. Fraud can be committed at all levels of an organization.
Every person who commits fraud is motivated by his own motives and opportunities. Pressure is one factor that can force an employee to perpetrate fraud. Pressure may involve targets to meet, need to be promoted or personal factors like gambling habits and final problems. An employee who is subjected to these pressures believes that they can be solved through fraudulent activities. Rationalization is another factor that can motivate an individual to commit fraud in the work place.
The fraudster may start from minor unauthorized risks to corrupt business practices and deception increase over time. He will rationalize the continued deception which will lead to a major fraud. This can be stopped in early stages if robust detection procedures are put in place. An opportunity to perpetrate fraud can trigger an employee to commit fraud (Vanderbilt, 2009).
Types of frauds
There are various types of frauds that can be committed by employees in the work place. Information technology fraud is the fraud committed by employees using modern technologies. The development of information and technology has removed some traditional safety measures provided by physical boundaries.
Crucial data and information, such as client’s details or financial information put in computer and websites may be changed or removed. This is made possible by weak internal control systems. The information and technology system may be hacked down by hackers. It also involves authorized access to bank accounts to transfer funds. Computer fraud may also involve obtaining payment for goods that are of low quality than advertised.
Intellectual property theft and publishing malicious claims about the company is also information and technology fraud. Identity fraud is another form of workplace fraud (Gottschalk, 2011). It involves impersonation of another employee or organization. This will enable the fraudster to buy goods or cheat customers in another person’s name or the name of the organization.
This can be perpetrated through hacking of a website or submitting false documents to the company. The increase of business and social networking websites increases the chance of identity fraud. The availability of personal information also triggers identity fraud.
An employee may also commit fraud through manipulation of accounts. Information on profits, sales, and purchases of inventories may be used to perpetrate fraud. This may be done for personal gain or to present a positive financial picture of a business which is not the true position (Kelly, 2010). Petty fraud is a low level form of fraud. This form of fraud is perpetrated in most organizations. Those who commit this fraud think that they are not doing wrong.
It involves exaggerating expenses or taking office supplies, which may affect the budget. Skimming is another form of fraud that can be committed by employees. It may involve taking unreported cash payments. Skimming involves a small amount of money, so it is hard to detect.
It can also be untraceable in the process of auditing the books of accounts (Vanderbilt, 2009). An example of skimming is where sales are not recorded in the register and they find their way into the cashier’s pocket. It can also occur when receipt records are falsified, and bank deposits are tampered.
Larceny is a form of fraud that happens after the cash has been recorded in the accounting system. Most of these frauds are perpetrated by bookkeepers and other employees who have access to books of accounts. Asset misappropriation is the most common type of fraud in the work place, and it is the easiest to understand. This might include things like theft of the money, stock theft, check forgery, payroll fraud and theft of services.
According to the recent survey, asset misappropriation occurs in over 91% of fraud scheme (Mahdawi, 2009). This makes it the most common fraud in the work place. Statistics indicate that this fraud is the least expensive per fraud basis. Bribery and corruption is another form of fraud. It includes fraud schemes such as kickbacks, bribes to influence decision making or manipulation of contracts.
Financial statements statement fraud does not occur frequently, but it is the most expensive. It involves manipulation of financial statements for the purpose of creating financial opportunities for an individual or entity. This also includes falsification of company’s financial statements to make it appear more or less profitable.
The fraudster can manipulate stock price, increase year end bonuses and other indirect benefits from the financial statement fraud. Managers may also inflate profits to obtain performance bonuses (Wilson, 2009). False accounting fraud may also involve covering up theft by altering, adding or falsifying stock purchases or other records.
Obtaining external financing by falsely improving the result is a fraud. Fraudulent financial statement involves overstating profits and understating losses or liabilities. Exchanged credentials involve fake documents, records or licenses which are used by persons seeking employment.
Fraudsters may also use another person’s credentials to access office or other work facility. Employees may also use false credentials to access unauthorized data. This may put the privacy of customers and confidential information of the organization in jeopardy. Occupational fraud involves the use one’s position in an organization for personal enrichment through deliberately misusing assets or resources of the organization. In United State the cost of occupational fraud covers around 7% of annual revenues (Wolfe, 2004).
The impacts of work place fraud
Work place fraud can affect an organization in several ways. It may lead to a severe financial implication to an organization. The loss of funds or equipment due to fraud will affect the financial position of an organization. A high level fraud will adversely affect the price of shares of a company in the stock market.
The work place fraud will also affect the reputation of the management (Gottschalk, 2011). Fraud may affect the ability of the company to deliver on future contracts. It will lead to negative perceptions from the public which hinder future clients and customers. Employee morale will also be affected by fraud. Trust among employees will be damaged. Future employment and retention of employees may depend on the size of fraud.
The person perpetrating work place fraud will also be affected. When a person is discovered that he has committed fraud he will suffer a lot of impacts. He will suffer financial loss through repaying the money taken or payment of fines (Fandray, 2000). The person will also lose personal and professional integrity, which may affect his future career. The fraudster may also lose his freedom if he is put in prison.
The management should establish a system of verification before any employee can access sensitive information. Passwords and account numbers should be changed frequently. The address swap is a form of fraud where an employee alters the address to which a check is sent and then changes it back.
The management should conduct regular reviews of all purchases, in order to prevent this form of fraud. It should also conduct frequent audits of accounts and contracts (Wolfe, 2004).There exist various good practice principles for deterring and detecting fraud. It is not practicable for an organization to prevent fraud fully. This is because the internal controls required will affect the organization’s ability to operate.
It will also be costly as the high cost of preventing fraud may outweigh the benefits of preventing it. Fraud deterrence involves improving organizational procedures to reduce and eliminate the causes of work place fraud. It involves short term and long term initiatives. According to the recent survey tips are the biggest sources of fraud detection. Employees are the most common sources of these tips. An organization may establish a fraud strategy statement.
This involves the top level management providing guidance on what is acceptable practice and what is not acceptable. The organization may also establish a register of interests to identify potential cases of fraud. It should also engage an audit committee to prevent fraud (Wilson, 2009). This committee will help in developing fraud prevention measures, investigate malpractices and suggest necessary actions to be taken by the organization.
Use of information technology may also help in preventing work place fraud. Most frauds in the work place occur because departments are not aware of each other’s operations.
Integrated data bases enable information to pass within and outside the organization. This will enable fraud to be identified easily. Cultural environment of the organization will affect cases of fraud. Information about fraud and corruption should come from the top management. It should also be reinforced through actions which will make the other employees follow (Mahdawi, 2009).
In case of a fraud, in the organization, the management should communicate the issue to the staff. The concern should be addressed, and conclusions given to staff on cases that are being investigated. The management should inform the employee on the meaning of fraud.It should also explain to them the effect of fraud to their jobs, and services provided to customers. It should make sure that employees are able to detect signs of possible fraud in the organization (Crowther, 2009).
The management may use presentations, formal policy statements or new letters to communicate to employees on issues of work place fraud. Whistle blowing is another strategy that can be used to prevent fraud in an organization. Workers should be aware of the reporting routine when they detect fraud. This can be through their supervisors, or independent appointed, member or an employee. Workers should not investigate cases of fraud themselves.
Employees who report frauds are supposed to be protected as per the public interest disclosure act. If fraud is detected, consideration is required when gathering supporting evidence. The organization should appoint a steering officer to conduct an investigation on fraud. The details of suspected fraud should be recorded in details with many specifics as possible (Fandray, 2000). The details should include dates, places, times and people.
The organization should consider the actions required in the process of investigation. It should also consider the likely outcomes such as internal disciplinary action and prosecution. The management should hold a meeting after investigations to discuss progress and identify future targets on cases of workplace fraud. The management should develop monitoring internal controls in order to deter many fraud schemes.
Duties of maintaining cash accounts and making deposits should be performed by different employees. The employee who handles cash should not be involved in reconciling the bank statement. Preparation and distribution of payroll should be done by two employees. Recording of inventory is supposed to be performed by a person who is not involved in physical count. Ensure verification of prices entered on the invoice by a cashier.
Avoid entrusting the entire accounting system to the same employee. The organization should also perform surprise audits to the books of accounts to detect frauds. The management should also show interest and support for the internal control system and communicate the benefits to employees.
It should also create a culture and an environment that does not put up with fraud. Develop a mechanism that will enable employees to report any form of wrong doing. The management should impose strict sanctions when employees are caught Perpetrating fraud (Wolfe, 2004).
Conclusion
Work place fraud is one of the major concerns by the management of an organization. It destroys organizations to a greater extent than just financial loss. About half of the organizations are victims of workplace fraud. A big portion of company’s revenue is lost through work place fraud. It is also noted that prevention of fraud incurs high cost (Crowther, 2009). Fraud perpetrated by employees’ ranges from exaggeration of a minor expense to international fraud.
Most of work place frauds are triggered by pressure, opportunity and rationalization. The management should develop a strategy on the deterrence of fraud and investigative procedures. It should also design a policy on the prevention of work place fraud. The policy changes should be communicated to the entire organization. This will help in adopting the new policy within the organization culture. The management should demonstrate interest and support to the internal control system in order to prevent fraud.
References
Crowther, D., 2009. The neccesity of fraud education for accounting students. Accounting education journal , 323-324.
Fandray, J., 2000. Workforce ethics. Journal of business ethics , 124-125.
Gottschalk, P., 2011. An opinion survey of chief financial officers. Influence of white-collar crime on corporate reputation , 95-96.
Kelly, P., 2010. Casino gambling and work place fraud. Workplace fraud , 224-225.
Mahdawi, I., 2009. Strategies of preventing fraud. International business ethics , 97-98.
Vanderbilt, T., 2009. Hard time bring more fraud. Tech that combats employee fraud, 67-68.
Wilson, K., 2009. Employees engage in check forgery and petty cash. Small businesses face more fraud in downturn , 132-133.
Wolfe, I., 2004. Cheating,lies,and other workplace ethics. Business ethics , 112-113.