Defining Occupational Fraud and Abuse

by Kirk M DaSilva

Fraud week was first organized around the year 2000 by the Association of Certified Fraud Examiners (ACFE). The ACFE is the world’s largest anti-fraud organisation and premier provider of anti-fraud training and education. The organization pro-actively fights fraud and helps safeguard not just businesses but world economies from what has become a most serious problem.

In the world of Commerce, businesses incur expenses or cost to produce and sell their goods and services. These costs include administrative and direct expenses, research and development and of course fraud. Fraud is usually hidden and most of the time is not seen as a line item in the financial statement, even though it is reflected in the profit or loss figures. For purposes of this brief article we can use the definition as posited by Joseph T. Wells in his Corporate Fraud Handbook. He defines ‘occupational fraud and abuse as “the use of ones occupation for personal enrichment through the deliberate misuse or misapplication of the employing organisations resources or assets”.

This very broad definition captures a wide range of conduct by senior business executives including senior and junior managers, and members of board of directors ranging from complex investment fraud to basic petty theft.

Fraud comprises any crime for a benefit or gain that uses deception as its main modus operandus. Fraud professionals identify three ways to illegally relieve a victim of his money: force, trickery or larceny. However it must be noted that all acts of deception cannot be deemed or contrived as fraud. To meet the legal definition of fraud there must be damage, usually in terms of monetary damage, to the victim. The following must therefore exist for fraud to be present:

• A significant or material false statement.
• Knowledge that the statement was false when it was uttered.
• Reliance on the false statement by the victim.
• Damages incurred as a result.

The word abuse has its origin from the Latin word ‘abusos’, meaning a deceitful act, deception, a corrupt practice or custom, ill-treatment and misuse. To deceive someone is to be false, to fail to fulfil, to cheat, cause to accept as true or valid what is false or invalid. The question often arises as a result of the various use of the language used to describe fraud and abuse, as to the key differences between them. A realistic example quickly illustrates this difference. Assume a cahier in a store in Kingstown steals $200.00 from the daily sales; we would quickly say that the cahier has committed an act of fraud. However, if she is paid $1000.00 per week and one day she pretends to be ill, and calls in absent, many of us may simply regard this as an abuse against her employer. However, we must note with great concern that in both instances the employer suffers a loss in the amount of $200.00. In our organization culture in St. Vincent and the Grenadines, in the case of the theft, the employee gets fired and may be prosecuted by law. On the other hand the employee who falsely stays at home may be simply reprimanded and in many instances the absence may be overlooked by management.

In St Vincent and the Grenadines, a litany of abusive practices plagues management and can be potentially costly to organizations. Some common abuses by employees include:

• Come to work late or leave early
• Abuse sick leave when not sick
• Take a long lunch or break without approval
• Being slothful and produce sloppy work
• Collecting more money than is legitimately due for expense reimbursement
• Claim more hours for over time than was worked
• Buy goods on behalf of friends and relatives, and claim discounts
• Stealing from the employers

In 1939, Edwin H Sutherland an American criminologist coined and used for the very first time the tern “white-collar crime”. At that time Sutherland’s definition meant the criminal acts of corporations and individuals acting in their corporate capacity. However, in modern day business, the term means almost any financial or economic misdeed from the most junior employee to the boardroom.
Numerous reasons have been put forward as to why people commit fraud and, studies have shown that the following are the main motivators of occupational fraud and abuses which can be classified under these headings:

• High personal debt
• Living beyond ones means
• A tremendous desire for personal gain
• Extreme gambling habits
• A strong determination to beat the system
• Dissatisfaction with pay
• Great family or peer pressure
• A dishonest wheeler-dealer attitude
• Imposition of unrealistic goals by employers

Of late it is good to note that financial institutions including our banks and other businesses have adopted a culture of zero tolerance to fraud. Recently the Bank of St Vincent and the Grenadines issued a statement pertaining to fraud at the bank; years ago this would never have reached the ears of the public. However, the bank in their statement emphasised a zero tolerance to fraud, a clear signal to employees of the tone from the top.

A poor tone at the top is cited as the main reason for approximately 20% of fraud cases throughout the world, with losses of millions of dollars. If the message is hinted whether explicitly or implicitly, that fraud is tolerated, employees may well rationalize that committing it is no big deal. Management’s attitude and choices do significantly influence a company’s culture, hence one of the best anti-fraud strategies is to create a culture of integrity. An African proverb aptly states that the “fish rots from the head down”. It is therefore incumbent upon organizations to create among members of staff, through training and policies an environment to help reinforce a culture of integrity and build loyalty to the organization. Employees who feel greater levels of loyalty are less likely to commit fraud.
This article focused mainly on occupational fraud and abuse perpetrated by employees within the organisation that result in serious harm to the business itself. In another article I will focus on frauds committed by those responsible for financial reporting, who manipulate financial information including financial statements, in order to commit fraud on investors or other parties, to benefit the organisation and themselves.

International Fraud Awareness Week was November 15-21, 2020. Kirk M DaSilva is a certified member of the Association of Certificate Fraud Examiners USA