Rogue Employees: How Your Most Prized Asset Can Be Your Worst Liability

By Allan James Miller

'Rogue Employees: How Your Most Prized Asset Can Be Your Worst Liability' is a short, quick-read, kick-in-the-behind book designed to nudge into action and assist those tasked with identifying and rooting out fraud from within their own organizations.

• Language: English
• Publisher: BookBaby
• Release date: Nov 1, 2013
• ISBN: 9781483511689

Book preview

Author

Introduction

It has always been argued that an organization’s most valuable asset is its people. Which is, for all intents and purposes, very true and all well and good. But conversely, an organization’s worst asset is, well, people. Why such a bodacious claim? It isn’t really. If you look at the facts, they will tell you that the incidence of occupational fraud is too significant to be ignored, and it is incumbent upon HR practitioners to identify and curtail such harmful activities. In this book I am going to take the liberty of relying on data supplied by the Association of Certified Fraud Examiners (ACFE), a U.S.-based global association of professional practitioners whose task it is to identify, detect and prevent fraud in the workplace. The association’s latest 2012 Global Fraud Survey is a detailed global statistical compendium of fraud schemes, victim organizations and a profile of perpetrators with a breakdown of known reported cases by region encompassing close to 100 countries. What is interesting to note is that the United States had the highest number of known reported cases (778) of fraud world-wide while Asia placed second with 204 known reported cases, ahead of Europe with 134 cases.

So let’s take a look at the various fraud schemes, victim organizations, and the types of perpetrators which altogether not only cast a dark cloud over an erstwhile happy company but which can cost so much internal damage and significant dents in profit that its effects can bring so much grief to private and public stakeholders. But before we do, here are the sobering statistics that the 2012 Global Fraud Survey highlights which should cause any HR manager or other senior personnel to stand up and take note:

A typical organization loses 5% of its annual revenue to fraud. Worldwide this amounted to US$ 3.5 trillion in 2012.

Nearly one-quarter of the frauds involved losses of at least US $1 million.

The frauds lasted a median of 18 months before being detected.

The industries most victimized were the banking/financial services, manufacturing and government/public administration sectors.

High-level perpetrators cause the greatest damage to their organizations, being three times more likely than managers and more than nine times as employees to do so.

Almost 80% of frauds were committed by individuals in accounting, operations, sales, upper management, customer service, or purchasing.

In the ACFE’s latest 2012 survey, history repeats itself, as time and again the impact of corporate fraud shows the staggering amount of financial loss faced by victimized companies, all attributed to rogue employees.

Fraud Schemes

By far the most significant fraud scheme which represents 90% of all known fraud cases is asset misappropriation which can entail the following: employees embezzling a company’s funds through such techniques as accepting cash either before it is recorded in the books, or after, when required to do so, by way of sales/accounts receivables collection (skimming, larceny); fraudulent disbursements of cash through fictitious invoicing, cheque tampering, fictitious or exaggerated expense reimbursements, and false payroll/compensation claims; or outright stealing or misuse of cash or non-cash assets. These non-cash assets can include inventory, supplies, investments and intellectual property to name a few. Cash does seem to be the primary target when all this is taken into account.

Interestingly, however, is that asset misappropriation, as prevalent as it is, only accounts for a miniscule median dollar amount of loss (US$ 120,000) when compared to the most costly of all fraud schemes – financial statement fraud. To illustrate the enormity of the crime, financial statement fraud (which can also be represented by manipulation/forging of documents and even false information on a CV), represents approximately 5% of the overall known reported cases but accounted for a median dollar amount of US$ 1 million! Corruption cases -- which entail such acts as bribery, extortion, conflict-of-interest and illegal gratuities -- are also part of the corporate problem which makes up the remainder of known reported cases and cost a median dollar amount of US$ 250,000.

So whatever way you look at it, people can cost their companies dearly. Let’s examine which organizations are the typical victims of these crimes.

Victim Organizations

According to the 2012 Global Fraud Survey, approximately 40% of victim organizations were privately-owned businesses, and nearly 28% were publicly-traded companies, meaning that almost 70% of victim organizations came from for-profit enterprises. Seventeen percent of frauds occurred at government agencies with not-for-profit organizations coming in at less than ten percent. In addition to being the largest victims of fraud, both private and public companies were victim to the costliest schemes, the median loss being US$ 200,000 and US$ 127,000 respectively. Losses incurred by government agencies and not-for-profits were almost half these amounts. Of significance is the fact that smaller organizations face disproportionately higher cases of fraud (32%) with increased sizes of organizations making up the remainder in the following proportions: approximately 20% for medium-sized firms, larger organizations (27%), and the largest companies (20%).

The industries with the highest incidences of fraud are: the banking/financial services sector which is by far the largest; followed by manufacturing, government and public administration, retail, healthcare, and insurance which are uppermost in the 2012 Global Fraud Survey list. The specific industries that suffered the highest median dollar losses were mining (US$ 500,000), followed by real estate (US$ 375,000), construction (US$ 300,000), and oil and gas (US$ 250,000). Other specific industries further down the list include natural resources, manufacturing, transportation and warehousing, technology, construction, services, and insurance.

What should be noted here is that depending on the size of the organization, different methods of fraud are reported. For instance, small businesses have disclosed that billing, cheque tampering, corruption, skimming and expense reimbursement fraud are the most common schemes, while larger companies find that corruption is their biggest problem, followed by billing, non-cash, and expense reimbursement fraud.

Perpetrators

The general finding that prevails among reported cases of fraud is that those persons in higher positions of authority cause the highest amount of fraud in terms of dollar losses. The median loss in owner/executive fraud was