Pub. 10 2015-2016 Issue 2

Community banks are disproportionately the target of occupational fraud compared to other typical businesses both because banks deal in money rather than goods, and because fraudulent transactions are difficult to notice among the multitude of transactions that occur at a bank every day. Many bankers are surprised to learn the most common, and often the most devastating, type of fraud is occupational fraud, or fraud perpetrated by an employee. The negative aspect of occupational fraud goes far beyond the dollar amount. It can damage your bank’s reputation, hurt morale and violate the trust you have placed in your colleagues. This article is the first in a series of seven intended to help you understand and mitigate internal fraud at your bank. Types of Occupational Fraud Occupational fraud falls into one of three categories: asset misappropriation, corruption, and fraudulent financial reporting. Asset misappropriation (also known as embezzlement) is the most common type, involving the theft or misuse of cash, supplies, inventory, or any other asset. Corruption means that an employee receives an undue benefit not consistent with their employer’s interest, such as bribes or kickbacks. Fraudulent financial reporting involves altering statements to present an inaccurate picture of the company’s financial situation. Since community banks are more likely to face asset misappropriation fraud than the other types of fraud, this series will primarily focus on that. What are the risk factors? Occupational fraud is often difficult to predict because most fraudsters have never before proven themselves to be untrustworthy. They may even be trusted friends or reliable senior staff—the last people you would suspect of a crime. To identify risk, look for the three factors known as the Fraud Triangle: Financial Pressure: While simple greed is often the motive for occupational fraud, some of your employees will face difficult situations, such as family issues, debt, or addiction. Normally honest people may make poor ethical decisions under extreme financial pressure. Opportunity: Once an employee feels they are under financial pressure, they are more likely to notice opportuni- ties for fraud. These opportunities are often the result of insufficient anti-fraud controls such as lack of segregation of duties, lack of a second person completing account reconciliations, failure to monitor of employee accounts, and lack of rigid ethics/compliance policies. Rationalization: When the opportunity is present, justifying fraud can be as easy as saying “I’ll pay it back later.” Desperation or bitter feelings can also make fraud seem like the “right” thing to do. Often the person committing the fraud starts small and expands their fraudulent activity as they rationalize their behavior over time. Breaking the Fraud Triangle FRAUD IN THE WORKPLACE SERIES THIS ARTICLE IS PART 1 OF 7 STAY TUNED FOR MORE ARTICLES!