In its 2018 Report to the Nations on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners reported that owners and executives accounted for only 19 percent of all fraud cases. Yet they caused a median loss of $850,000 vs. a median of $100,000 for rank-and-file employees.
Executive thieves get away with more because they have greater access to assets and can more easily override internal controls. Their schemes also tend to continue for longer periods before detection — an average of two years vs. one year for nonmanager employee schemes. So, it is critical to spot the signs of executive fraud and nab these high-placed thieves.
Greater authority = greater damage
Traditional preventive measures, such as background checks, may be ineffective when it comes to executive fraud because many of these perpetrators are first-time offenders. Fortunately, their schemes tend to raise red flags. Crooked executives often are reluctant to cooperate with internal investigations and outside auditors and may show disrespect for regulators. Sometimes, they offer unreasonable responses to reasonable questions or become agitated or annoyed when probed about financial discrepancies.
Often, their lifestyles betray them. A thieving executive may begin spending extravagantly on expensive cars and vacations. Or a formerly fiscally healthy individual may appear to be mired in debt and have credit problems. In some cases, the motivation for fraud is a substance abuse or gambling problem.
Vulnerabilities create opportunities
Weak internal controls make fraud easier for executives to perpetrate. Vulnerable organizations may have minimal or no segregation of duties, little external audit oversight, a lax or inexperienced accounting staff, and excessive trust in key executives. Environments where all decisions are made by an individual or small group are also at higher risk. And companies in financial distress provide particularly fertile ground for fraud perpetrators.
Some executives commit fraud for what they believe is the benefit of the company. Financial weakness, out-of-control expenses, tax adjustments by the IRS, credit difficulties, and pressure to meet budgets and earnings projections can all motivate an executive to do ‘whatever it takes’ to prop up the company. When bottom-line results seem too good to be true, that just may be the case.
Tone at the top
Executive fraud can have devastating financial consequences and harm your company’s reputation with shareholders and the public. Also, it sets the ethical tone for the entire organization. Employees who know or suspect their superiors are dishonest are more likely to cut corners — or steal — themselves. So, if you suspect fraud in your organization or need to bolster your internal controls, contact us.