Borrowers and Occupational Fraud

Every two years the Association of Certified Fraud Examiners (ACFE) conducts a fraud study, the Report to the Nations on Occupational Fraud and Abuse. A typical business loses 5% of their revenues to fraud. The median loss of revenue rose $5,000 from $140,000 to $145,000 from the 2012 study to the 2014 study. Discover which industries are the most fraud-prone and what questions you can ask yourself to better asses fraud risks for your borrowers.

Fraud-prone industries 

Certain industries tend to report more frauds than others. The most victimized sectors in the ACFE’s 2014 study include: 

Banking and financial services. Lenders are no strangers to fraud. Financial institutions reported the most fraud cases, accounting for 17.8% of the cases in the ACFE study. This sector reported a median loss of $200,000 and is especially vulnerable to stolen cash and corruption schemes. So before assessing your borrowers’ risks for fraud, you may want to turn inward and assess your own risks. 

Government and public administration. More than 10% of the cases occurred in this sector, but the median loss was just $64,000, significantly lower than the median loss across all sectors in the study. Billing and corruption schemes are common in this sector. 

Manufacturing. About 9% of frauds were reported by manufacturers. This sector suffers from above-average risk of corruption, billing fraud and noncash thefts (of such assets as inventory and small equipment). Manufacturers also suffered a median loss of $250,000, significantly higher than the overall median. 

Health care. Doctors, hospitals and other health care providers accounted for 7.3% of the reported cases. With a median loss of $175,000, they’re especially prone to corruption and to billing and expense reimbursement frauds. 

Education. Most susceptible to the same types of fraud as health care providers, educational institutions accounted for 5.9% of the cases. The median loss was only $58,000, however. 

Retail. This sector accounted for 5.6% of the reported cases and reported a median loss of $54,000. Retailers are especially vulnerable to inventory theft, as well as corruption schemes and thefts from cash registers and bank deposits. 

10 risk-assessment questions 

Here are 10 questions lenders can ask to evaluate a borrower’s antifraud controls, based on the ACFE’s Fraud Prevention Checklist: 

1. Is ongoing antifraud training provided to all employees? Everyone in the organization should know what antifraud controls are in place and where they can report unethical behavior. 

2. Is an effective reporting mechanism in place? Tips are the most common way fraud schemes are exposed. Employees, customers and suppliers should trust that they can anonymously and confidentially report fraud without fear of retribution. 

3. What steps are taken to increase employees’ perception that detection is likely? Would-be fraudsters might reconsider dishonest behaviors if they think someone’s monitoring them. 

4. Is the tone at the top honest and ethical? Subordinates often follow the example set by the boss. Beware of owners who set unrealistic goals. 

5. Has a formal fraud risk assessment been performed? This is normally part of a CPA’s audit procedures — or it may be performed as a separate “agreed upon procedures” engagement. 

6. Does the company have a strong internal controls program? A comprehensive internal controls program includes separation of asset-handling duties, job rotation, physical safeguards and mandatory vacations. Hiring policies should also restrict borrowers from hiring people with poor credit or criminal records. 

7. Does the company have an internal audit department? If so, it should have adequate resources and authority to investigate fraud. 

8. Does the company offer employee support programs? Employees with financial problems, such as bankruptcy or gambling addictions, have an added incentive to steal. Support programs can help employees overcome these problems. 

9. Does the company have an open-door policy? Employees should feel free to discuss personal problems and workplace pressures with their supervisors and human resources personnel. Doing so can substantially reduce the motive to commit fraud. 

10. Are anonymous surveys conducted to assess employee morale and ethics? Co-workers are often the first to hear about illegal activities happening in the workplace, and fraud typically lowers morale. But unless the employer asks, employees might not tell. 

Recouping losses 

Once fraud occurs, losses are usually permanent. The ACFE reports that nearly 60% of the companies that report fraud recover nothing from perpetrators. So, preventive efforts are in a borrower’s best interests — and yours. If you have any questions or concerns please contact Paul Atkinson, Marvin Willis or another member of our lender services team at 404-874-6244.