Occupational fraud: a global epidemic costing trillions

On average, about 5% of the revenue of any given company is lost to fraud committed by employees. This is according to the latest data in Occupational Fraud 2022: A Report to the Nations, released by the Association of Certified Fraud Examiners (ACFE).

The bi-annual report was compiled from 2 110 cases of fraud investigated in 133 countries. It found that more than $4.7 trillion is lost annually to occupational fraud worldwide, possibly making it the costliest and most common form of financial crime in the world – bigger than healthcare fraud, tax evasion, money laundering, and identity theft.

Occupational fraud – also referred to as employment fraud – was again the centre of attention during International Fraud Awareness Week earlier this month. Started in 2000 by the ACFE, it sees hundreds of organisations coming together every November, pledging to spread fraud awareness in their companies and communities.

A study by the ACFE found that when organisations provided fraud training for their employees, fraud losses decreased by 38% and the duration of fraud decreased by 33%.

Christo Snyman (pictured), the chief executive of forensic investigative services company CS Forensics, says in combating cases of employee fraud, constant vigilance is a best practice principle.

“In addition, forensic audits and investigations conducted by third-party service providers are key components of the fraud detection and prevention process,” Snyman says.

Facts and figures

The Occupational Fraud report found that South Africa tops the list of sub-Saharan African countries in terms of its high incidence rate of organisational fraud.

According to the Africa Organised Crime Index, South Africa ranks fifth out of 54 countries on the continent in terms of its rate of criminality. On the global scale, South Africa ranks seventh out of 193 countries, with Nigeria in sixth place, and the Democratic Republic of Congo in fifth.

Read: Global crime index reveals ‘significant expansion’ of financial crimes

Snyman says “the nature of organised crime in the country varies, but includes financial crimes such as money-laundering, corruption and tax fraud, which is a lot of what we see unfold in employee fraud”.

The ACFE categorises occupational fraud into three main types:

• corruption;
• financial statement fraud; and
• asset misappropriation.

According to the ACFE, corruption involves the misuse of one’s position for personal gain through bribery, extortion, or similar activities. This type of fraud often involves individuals in a position of authority who exploit their power for financial or personal benefit.

Financial statement fraud involves the intentional misrepresentation of an organisation’s financial statements. This can include manipulating the company’s financial records, inflating or deflating profits, or engaging in other deceptive accounting practices. Financial statement fraud can be perpetrated by individuals or groups within an organisation and often has the goal of presenting a false image of the company’s financial health.

And then there is asset misappropriation. This refers to the theft or misuse of an organisation’s resources by employees. This category includes various fraudulent activities such as embezzlement, skimming, and payroll fraud. Unlike corruption and financial statement fraud, asset misappropriation does not involve the manipulation of financial statements.

Payroll fraud: a case in point

Talking to some of the most prominent kinds of employee fraud within South Africa’s corporate environment, Snyman refers to a recent case where an employee of a travel management company went on to be employed by a retail service firm and was found to have defrauded both companies of more than R500 000.

A member of the company’s management team flagged suspicious salary payments and other payroll-related transactions.

Snyman explains: “When we reviewed the multiple documents and assessed the company’s financial records, we found that the employee had manipulated the firm’s payroll system to prevent PAYE tax from being deducted from her salary.

“She also withdrew from the company provident fund to ensure that no deduction was made from her salary – an action taken against company policy.”

The employee was also found to have sanctioned other payroll-related funds to be allocated to accounts that had been fraudulently created on behalf of fictitious employees.

He adds that some of the most common ways in which payroll fraud plays out are through the payment of “ghost employees”, the falsification of hours worked, or the creation of fictitious overtime used to inflate pay.

How to curb employee fraud

The ACFE’s Fraud Triangle theory suggests that the presence of three elements – pressure, opportunity, and rationalisation – increases the likelihood of fraud. The organisation emphasises the importance of implementing strong internal controls and anti-fraud measures to reduce or eliminate the opportunities for fraud within an organisation.

Snyman recommends measures such as:

• Regularly conducting surprise audits to uncover inaccuracies or discrepancies that may indicate fraudulent activities.
• Paying special attention to the payroll system, conducting frequent checks, especially during employee departures.
• Consistently updating employee files to keep accurate financial records.
• Meticulously examining bank statements. Verifying the details of bank account numbers ensures that funds are channelled into the correct accounts.
• implementing a payment audit trail to serve as an additional layer of scrutiny to the process, enabling a comprehensive overview of the accounts into which money is deposited.

“In cases where suspicions arise, the importance of forensic imaging and analysis cannot be overstated. Obtaining company laptops and cellphones for this purpose is a critical step. The process involves an in-depth examination of emails, documents, and an analysis of the payroll system to ascertain what has been disbursed and what remains unpaid.”

Snyman says this scrutiny should extend to verifying the identities of employees, ensuring they are genuine and their details are accurate.

“Such comprehensive forensic measures serve as a robust deterrent and detection strategy, fostering financial transparency and safeguarding the company’s assets,” he says.