9 Characteristics of Fraudsters That Accountants Need to Know

Gusto Editors

Are you concerned about your clients falling victim to fraud? Are you unaware of how frequently fraud occurs? It might not be the first topic that comes to mind as an accountant, but it is more common than you might think and necessary to understand it before it’s too late for your clients.

Gusto is committed to bringing you expert knowledge about how to avoid fraud and how to spot a fraudster with our partners at CPA Academy.

Gusto’s very own Editor-at-Large, Caleb Newquist, took some time to chat with one of CPA Academy’s regular contributors, Greg Kyte. Greg has been included in Accounting Today’s list of the “Top 100 Most Influential People in the Accounting Profession,” and he has a wealth of knowledge when it comes to fraud.

In the Gusto webinar “Fraud and Fraudsters: Meet the People Who Are Stealing Your Stuff,” they discuss the impact of occupational fraud on the economy, the accounting profession, and explore the common characteristics of the people who commit fraud. Understanding these metrics can help you prevent fraud or detect fraudsters earlier for your clients.

How prevalent is fraud?

Not convinced that fraud is a threat to your clients? Based on the Association of Certified Fraud Examiners’ (ACFE) annual report, it’s estimated that the typical organization loses 5% of its annual revenue to fraud.

“Using that data, that estimate of 5% loss to fraud, they expand that out to say for the 2020 report to the nations, they’re expecting there to be a $4.5 trillion loss due to fraud in 2020, which is a huge amount of money.”

Greg Kyte

While these figures are global, the $120,000 median loss per company due to fraud has been broken out in the U.S. and in Canada. However, the average loss of all 2,500 cases globally to fraud was $1.5 million.

The difference between these median and average numbers tells us that the majority of that $4.5 trillion is smaller frauds that add up over time.

Small businesses with staff under 100 people represent 26% of all fraud cases, and the median loss is $150,000. A loss this size will be felt much more than its larger counterparts.  

Occupational fraud is broken into three categories:

  • Asset misappropriation 
  • Bribery and corruption
  • Financial statement fraud 

In one-third of the cases in their study, the fraudster committed more than one of the three primary categories of occupational fraud.

Asset misappropriation is the one we hear about the most because it’s the easiest of the three — it includes actions such as check forgery, theft of money, inventory theft, payroll fraud, or theft of services. Recent statistics show that asset misappropriation happens in over 86% of fraud schemes. While the most common fraud, statistics show that it is the least expensive fraud on a per-fraud basis with a median loss of $100,000.

Corruption sits in the middle of both, accounting for 43% of the cases and a median loss of $200,000. While financial statement fraud is only 10% of cases, the median loss is $954,000. 

Wondering how you can spot a fraudster in your business? With help from ACFE’s “fraud bible,” let’s profile the typical perpetrators committing fraud.

Unpacking the 9 characteristics of fraud perpetrators

The information being shared is based on the ACFE’s biannual “Report to the Nations” on occupational fraud.

Interestingly, 43% of all fraud is detected by a tip, mostly coming from employees, with a typical fraud case lasting 14 months before detection. Having fraud hotlines or specific emails provided the key to catching fraud, as 33% of tips come from these sources.

The key goal is to identify the common characteristics and risk profiles of those who commit occupational fraud, thereby helping organizations better understand and identify the risks and red flags of fraud in their own workforces.

Woman forward facing sitting at desk reviewing paper document

#1: Position & level of authority

The most common one might come as a surprise to you — it’s simply a standard employee 41% of the time. It beat out managers (35%), owners (20%), executives (3%). However, the level of authority within an organization tends to strongly correlate with the size of a fraud.

“And so unsurprisingly owner executives [emphasis added] are the most damaging in terms of how much they can get out. And, again, that goes back to everything that we know, even from auditing standards, is that the management often can override internal controls, things like that. There is a lot more opportunity for them to not just get away with fraud, but get away with bigger dollar fraud and get away with it for longer.”

Greg Kyte

#2: Tenure

Unsurprisingly, the report shows that the longer a perpetrator works, the more damage they are likely to cause. The most common category here, though, is one to five years in the company with 46% of cases showing a median loss of $100,000. The most damage is from people who have been employed for more than 10 years with $200,000. As an example, in one of the largest single fraud cases, highlighted in the documentary All the Queens Horses, the fraud itself spanned over 20 years, totaling a whopping $53 million.

#3: Departments

The top five departments for fraud are Customer Service (9%), Sales (11%), Executive/Upper Management (12%) Accounting (14%), and finally the Operations Department (15%).

“In the past, accountants have been the most common, but, like I said, for this report, … [fraud in] Operations actually just nudged out accounting. The most damaging was the board of directors, again, unsurprisingly just based on the fact that they’ve got more control, they can bypass the internal controls”

Greg Kyte

The executive/upper management team and the accounting department were both associated with high frequency and median loss, which indicates that fraud risks in these areas should be carefully addressed in any anti-fraud program. When we’re looking at the board of directors, they are a very small percentage, just 1%, but their median loss accounts for $750,000.

#4: Gender

“Men are committing 59% of the fraud, specifically for the United States and for Canada. If you look globally, … 70% [of fraudsters] … are men. … And then the most damage is also caused by men.”

Greg Kyte

The median loss for men is $150,000 compared to $85,000 for women.

#5: Age

ACFE lists nine different age ranges, and we see the majority of fraud spanning three age ranges from 31-50, with the highest age range being 36-40 years old with 19% of the fraud.

The median loss tells a different story, with the graph steadily increasing as we go up the age ranges. The most damage, interestingly, is by the people who are over 60 with a $575,000 median loss.

#6: Education

The most common group to commit fraud are those who have a university degree (49%). The other three categories are those with high school diplomas or less (22%), some college education (14%), and lastly those with postgraduate degrees (15%). The most damage from fraud is committed by someone with a postgraduate degree with a median loss of $200,000. The median loss for people who have a university degree was $175,000..

Younger male sitting on yellow couch with glasses with legs crossed writing on a book

#7: Collusion

The ACFE investigators also analyzed if people working alone or working in a group were most likely to commit fraud.

The most common case is with a single perpetrator — 49% of fraud is committed by one person. Cases with two perpetrators are last occurring 18% of the time, while three or more perpetrators occur in 33% of the cases. This 51% of cases involving multiple people casts a shadow on the most common internal control to prevent fraud, which is the separation of duties.

“If separation of duties is just simply to try to limit collusion, then it’s working about half the time. It’s less and less effective for control. Most damages done by three-plus perpetrators [with a median loss of] $350,000” 

Greg Kyte

#8: Criminal background

Most people who commit fraud have no prior charges or convictions — 89% of perpetrators having no record or charges against them. The most surprising thing is that 11% of people were either charged or convicted with fraud and still hired in a position where they had an opportunity to commit fraud again.

“The guy who hired me at my current job, he basically stole $605,000 from this company. It was a loan, but he’d had the loan for years and had never made a single payment on the loan. With imputed interest, it was actually closer to $800,000, but when he finally got fired, he was fired. He was disciplined for it, but we never took any legal action against him. The fact that someone was charged or convicted with fraud does not necessarily mean that they never committed a fraud before. They were just never charged or convicted of it.” 

Greg Kyte

This is a powerful insight into some of the pitfalls of simply relying on background checks. Before hiring an employee, be sure to look beyond the background check. Ask their previous employers about their work performance, and be sure to vet their character as well as their skill level.

#9: Employment history

The ACFE report shows that 86% of people committing fraud have never been punished or terminated for fraud-related conduct. Of these people, 14% were punished or terminated prior for fraud-related conduct and again highlights the importance of doing a background check. Worryingly, the report shows 5% of fraudsters, once caught, aren’t punished at all.

“They’re not fired, they just say, “Stop committing that fraud.” Which, again, seems weird, but that was exactly what happened with my boss. I was an internal accountant. I go, ‘What the hell is going on with this?’ I bring it up to the managers at our company. They didn’t want to fire him because he was 65 at the time when I started working there. I’m bringing it up to the owners of this company, going, ‘He’s got this loan that he’s never paid off.’ Again, with imputed interest, it was over $700,000, and the owners didn’t want to punish him for two reasons. One is that they were embarrassed that he stole that much money on their watch, and they were worried that it was going to come back and be egg on their face, which it would’ve been.” 

Greg Kyte

Of people who are caught, 10% are permitted to resign. They’re usually not terminated or punished — just allowed to resign. Then 11% signed a private settlement agreement, which, again, doesn’t necessarily mean that they were punished or terminated for fraud-related conduct.

The ACFE report cites that for both criminal background and for employment history, 48% of organizations do not run background checks. This is a basic part of the fraud prevention regimen at a company — when you hire someone new, perform a background check. While a background check doesn’t tell you everything about an employee, it’s a great first measure to ensure you’re not hiring someone with an accounted history of fraud. 

PRO TIP: Run background checks on existing staff members every two years. Keep doing it because they might be getting in trouble, and you just don’t know about it.

Understanding behavioral red flags and next steps

Full disclosure — these are some interesting data points that don’t necessarily determine who’s going to commit fraud. It just means that the people who have committed fraud exhibit these characteristics.

Fraud is a difficult topic to approach, and many people don’t think it will affect them. We hope the information above has given you some insights into what areas of your clients’ businesses are most vulnerable and helps you start thinking about processes you can put in place to detect fraudsters. 

Fraud can be a daunting topic to contemplate, but you don’t have to do this alone. Gusto is here to assist you and help you through the process! If you’re interested in learning more about fraud and how you can avoid it, check out Part Two of this webinar to hear about a fraud case in detail. 

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Gusto Editors Gusto Editors, contributing authors on Gusto, provide actionable tips and expert advice on HR and payroll for successful business management.
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