Most people are familiar with the concept of fraud, but its appearance within an organization—and the damage it can cause—might be surprising. In this article, we’ll explore how to detect occupational fraud, share real examples from businesses, discuss its impact on your organization, and offer strategies to protect against it.
What is Occupational Fraud?
Merriam-Webster (2022) defines fraud as the “intentional perversion of truth in order to induce another to part with something of value or to surrender legal right.”
In simpler terms, fraud is a criminal act intended to deceive someone for financial or personal gain.
But what might fraud look like within your organization? Occupational fraud includes deceptive acts committed by employees, managers, executives, or even business partners.
Your business may encounter two types:
- Internal organizational fraud – When an employee, manager, or executive deceives the organization for personal gain.
- External occupational fraud – When outside sources, such as vendors or customers, commit fraud against your organization.
These types of occupational fraud typically fall into one of three categories:
- Corruption
- Asset misappropriation
- Financial statement fraud
The 3 Risk Factors for Fraud
There are three motivations for why people commit fraud, and they are referred to as the fraud triangle.
Motive
Motive—often driven by incentives or pressure—can lead someone to commit fraud. This may involve:
- An individual facing financial difficulties seeking ways to make ends meet.
- An individual responding to unrealistic performance expectations or reward structures that push them to inflate the organization’s profitability or growth metrics.
It’s worth noting that executives aren’t exempt from committing fraud. Having more authority means that greater damage can happen to a business; however, their red flags often give them away.
Opportunity
Opportunity is just as it sounds—a vulnerability that an employee exploits. This could be a weakness, like limited management oversight in a small business, which they leverage to commit fraud.
Rationalization
People who commit fraud often find ways to rationalize their behavior. They might think:
- They deserve the money because they didn’t receive a raise.
- It’s acceptable to take the money since others are doing it.
- They’re acting in the business’s best interest (a common belief among executives).
- That’s just how the game is played.
Occupational Fraud Examples
There are many ways someone can commit fraud within an organization. Here’s a look at some common forms of corruption, asset misappropriation, and financial statement fraud:
- Net Worth Overstatements (e.g., improper disclosures)
- Net Worth Understatements (e.g., timing differences)
- Fraudulent Disbursements (e.g., payroll schemes)
- Conflicts of Interest (e.g., sales schemes)
- Bribery (e.g., bid rigging)
- Economic Extortion
- Illegal Gratuities
Consider a nurse taking unrecorded vacation or sick leave, an executive using a corporate credit card for unauthorized personal expenses, or a warehouse employee stealing inventory. These are all examples of internal occupational fraud.
How Does Fraud Affect Your Organization?
The unfortunate reality of fraud is that it causes billions in losses for companies, governments, and individuals worldwide. Certified Fraud Examiners (CFEs) estimate that organizations lose about 5% of their revenue to fraud each year, with an average loss of $1,509,000 per case.
Fraud within your organization can lead to significant financial strain, which may result in:
- Layoffs
- Reduced raises
- Decreased employee benefits
- and more
It can also harm your organization’s reputation, affecting its ability to attract and retain employees, customers, and business partners.
Here are some noteworthy fraud trends:
- In the U.S., males are more likely to commit fraud (62%) than females (38%).
- Fraud is being detected faster and causing smaller losses, thanks to increased awareness.
- More fraud cases involve individuals in higher authority roles.
- Anti-fraud controls are being implemented more widely.
- Fraudsters are increasingly collaborating with one another.
How to Detect Fraud in an Organization
What’s particularly alarming about occupational fraud is that many cases go undetected. The pandemic further exacerbated this issue by creating additional opportunities for fraud in some organizations. According to the Association of Certified Fraud Examiners, half of the fraud cases they studied in their 2022 report were impacted by pandemic-related factors.
The good news is there’s a method you can implement right now to enhance fraud detection in your organization.
Implement a Fraud Hotline
The number one best way to uncover fraud within your organization is through tips. This has been an ongoing trend over the past decade. In 2024, 43% of fraud cases studied by ACFE were discovered through tips – nearly three times as many cases as the next most common detection method.
More than half of these fraud tips came from employees, while another third originated from external sources, such as vendors and customers. This underscores the importance of anti-fraud education and clear communication of reporting mechanisms within your organization.
Implementing effective training and processes, as recommended by Certified Fraud Examiners (CFEs) or Certified Public Accountants (CPAs), is crucial for organizations of all sizes.
A tip hotline is essential. Here are some compelling statistics that highlight its importance:
- Combining a hotline with training can increase tip-based detection by 38%.
- Organizations with hotlines detect fraud within 12 months on average, compared to 18 months without one.
- Organizations without a hotline experience double the financial losses from fraud.
Fraud Allegation Training
Not everyone who reports fraud will use a formal mechanism like a hotline. Many may reach out to various individuals within your organization, but they’re most likely to report to their direct supervisors. That’s why it’s crucial to provide all staff with clear guidance on how to handle fraud allegations effectively.
Reduce Duration & Loss with Specific Active Detection Methods
Tips take around 12 months to lead to detection, with an average loss of $117,000. Other active methods, like internal audits and management reviews, also have a 12-month detection duration, with losses averaging $108,000. To reduce detection time and financial impact, consider implementing alternative active detection methods.
Using automated transaction and data monitoring, surveillance, and account reconciliation can help detect fraud more quickly—within 8 months on average—and reduce losses to around $75,000.
Executive Fraudsters & Red Flags
Many executives who commit fraud are first-time offenders, meaning typical preventative measures may not catch them.
However, their schemes often reveal red flags:
- Executives engaged in fraud may become defensive or uncooperative when questioned about financial discrepancies, especially during internal investigations or external audits.
- Personal warning signs may emerge, such as a previously financially responsible executive suddenly living extravagantly or accumulating substantial debt.
- Signs of addiction, like gambling or substance abuse, may also indicate potential issues (Anderson & Whitney, 2019).
If you observe any of these behaviors, it’s worth investigating further.
Fraud Examples in Business
Examples of fraud in business are all too common. If you keep up with the news, you’ve likely encountered numerous cases of occupational fraud. Below are two real-world examples of occupational fraud, along with solutions that could have prevented these incidents.
The Importance of Account Reconciliation
Have you heard about the Utah woman sentenced to two years in prison for embezzling $1.6 million? Between 2015 and 2018, she stole funds from a meat processing business through 107 transactions disguised as duplicate payments to 14 different vendors (AP, 2022)
Prevention Solution: Assigning a separate individual to reconcile credit card activity could have prevented this fraud.
Nonprofits and Fraud
Nonprofits are not immune to fraud. In Philadelphia, a former accounting manager defrauded a nonprofit, quasi-governmental organization over seven years, stealing $2.6 million to fund gambling and luxury vacations.
The defendant was charged with creating fake vendor invoices for legitimate vendors, altering the vendors’ names to her own. She was ultimately sentenced to over four years in federal prison.
Prevention Solution: Automated monitoring could help prevent this type of fraud by running background checks that compare employee addresses and bank accounts from payroll records against vendor records. If a match is found, an alert is triggered, reducing the need to grant access to sensitive, personally identifiable information.
How to Protect Your Organization Against Fraud
How can you protect your organization against occupational fraud? The first step is recognizing the real threat it poses. Many business leaders overlook fraud, which leaves their organizations vulnerable.
Teal’s experts recommend a proactive approach—implement anti-fraud controls before fraud occurs.
Taking preventative measures is the most cost-effective way to minimize losses. Ensure your organization:
- Provides comprehensive anti-fraud training.
- Implements robust anti-fraud controls.
- Maintains an open-door policy for employees to report concerns.
- Conducts surveys to gauge employee morale.
- Has a management team that employees trust to act with integrity.
- Offers a secure and accessible fraud reporting mechanism, like a hotline.
- Performs regular risk assessments and addresses vulnerabilities to both internal and external fraud.
- Supports employees through programs for addiction, mental health, family, or financial challenges.
- Informs employees of ongoing fraud detection practices, including surprise fraud audits and proactive data analytics techniques.
Risk Trends: Fraud in Small Businesses
In 2022, larger organizations (100+ employees) had higher frequency in most documented schemes. However, there were two schemes that occurred more frequently in small businesses:
- Skimming (9% of cases)
- Check and payment tampering (10% of cases).
While skimming and payment tampering were more common in small businesses, the scheme that impacted them the most was corruption, accounting for 24% of cases. In fact, all surveyed industries were found to be at high risk for corruption.
Organizations in the following sectors should prioritize anti-corruption controls in the coming years:
- Government & public administration
- Technology
- Information
- Healthcare
- Energy
- Retail
- Insurance
- Education
- Construction
- Manufacturing
- Food service and hospitality
- Banking and financial services
- Transportation and warehousing
Occupational Fraud Prevention
Now that you understand what occupational fraud is, you can make sound decisions for how to protect your organization against it. Experts agree that prevention is key.
If you’re struggling to implement the controls you need in-house, we recommend partnering with a managed service provider.
Teal offers responsive and secure managed IT services to SMBs nationally, with local headquarters based in:
If you’re interested in learning about our premier IT consulting, contact a Teal business technology advisor.