Mitigating occupational fraud: safeguarding profits in your business

What is occupational fraud?

Occupational fraud happens when an employer steals or unfairly takes company assets from their employer. Types of occupational fraud include:

• Asset misappropriation: using company money for personal gain, such as skimming profits
• Financial statement fraud: intentionally misrepresenting a company’s financial data
• Moonlighting: holding down and concealing a second job, causing mistrust
• Expense abuse: submitting false expense claims for financial gain
• Equipment theft.

Gone unnoticed, occupational fraud is a silent but significant reason for eroding company profits.

The Fraud Triangle

According to criminologist Donald Cressey, there need to be three factors present for activity to be classed as occupational fraud. He calls this the “Fraud Triangle”, wherein motivation, rationalisation and opportunity intersect.

For example:

1. Motivation: employees must need a motive to commit fraud, such as financial pressures
2. Rationalisation: employees may be frustrated and use this to rationalise their actions
3. Opportunity: if there are no means for prevention in place, the employee may want to act.

While it is hard to control motivation and rationalisation, we can focus on the opportunity – and preventing it. The key to fraud deterrence lies in breaking this fraud triangle.

Telltale signs of fraud

Often, owners who discover fraud admit that they had a “gut feeling” or ignored the signs. There are broader things to look out for, as well as role-specific. For example:

Broader signs

Staff may refuse to share duties or even take annual leave. If they’re visibly living beyond their means, or facing financial hardship, these combined factors may be an indicator.

Accounting

If you notice a high number of voided transactions or irregular reconciliations, these should be treated as a red flag.

In the field

Employees may pad their timecards with non-trackable hours or refuse to use job-costing systems. They may even misuse tools or claim they have lost them.

Recognising all of these patterns can be the first step to preventing significant financial losses.

Internal controls that reduce fraud risk

To reduce fraud risk, you should create a process or review, separation of duties, and layers of responsibility. This starts at the top, with owners actively instilling a clear ethics policy. Specific controls include:

• Banking: keeping payment and reconciliation duties distinct
• Processing: processes for requiring approvals and verifying invoices. Signature stamps should be avoided
• Payroll: verifying rates, using timecards and approving overtime
• Field: ensure only authorised employees can make purchases, and track asset use
• Inventory and assets: accurately count and secure all equipment.

You may also consider introducing anonymous reporting channels. Cybersecurity should be a central focus for all operations, including regular password changes.

Building a culture of prevention

The right processes and controls are just the start of fraud prevention. Rather, your company should have a clear culture of ethics and transparency.

In practice, this means training employees with regular refreshers. You should communicate your policies clearly through tools such as email or the company handbook, ensuring employees have read and acknowledged them.

Reporting should also be encouraged, giving employees full anonymity. As the leader, it is your duty to lead by example, and act quickly on anything suspicious. The system should nurture trust in the controls, not the people.