Fraud can happen at any level in any department of any business, and it does. Every day. And that includes having fraud in your legal practice. When it comes to protecting your legal practice from fraud, you are your own first line of defense.
You need to be aware of the departments that most commonly house fraudsters and the schemes that are most commonly perpetrated within those departments. Arming yourself with this insight will help prepare you to recognize early warning signs of fraud.
According to the Association of Certified Fraud Examiners 2010 Report to the Nations, more than 80% of the fraud reported in the study was committed by individuals in six departments: accounting, operations, sales, executive/upper management, customer service and purchasing. The frauds in these six departments accounted for 95% of all fraud loss reported in the 2010 study.
Accounting comprised both the highest percentage of incidents of fraud (22%) and the highest median loss reported ($180,000). Check tampering is the most common fraud scheme in the Accounting department, reported as 33.2% of 367 cases. The second most common accounting fraud involves billing, at 30.8% of cases reported. The accounting department is not the only place fraudsters like to work and hide. Operations accounted for 18.0% of reported frauds, with a median loss of $105,000. Corruption was the most commonly reported scheme in the Operations Dept., at a rate of 30.8%. The second most common was billing (22.1%).
The Sales department and Executive/Upper Management were tied for the frequency of fraud at 13.5%, but it is obvious that the higher a person climbs up the corporate ladder the more lucrative their fraud can be. The median fraud loss perpetrated by the Sales department, $95,000, seems like child’s play when compared to the median loss from Executive/Upper Management fraud – $829,000.
Both the Sales department and Executive/Upper Management favor corruption fraud, with frequency reports of 33.8% and 48.7% respectively. The second choice for Sales is non-cash fraud, at a rate of 23.6%, and billing fraud for Executive/Upper Management, at a rate of 40.6%.
Apparently quite a few Customer Service personnel believe in serving themselves at the company’s expense. Customer Service fraud accounted for 7.2% of reported fraud with a median loss of $46,000. The most common scheme in the Customer Service Dept. is corruption, at a rate of 21.7%, followed closely by skimming, at a rate of 19.2% of reported fraud. Purchasing rounds out the top six at 6.2% of fraud with a significant median loss of $500,000. At 71.8% frequency, corruption is the clear leader in Purchasing department fraud, followed by billing at 42.72%.
It is worth noting that corruption is the most commonly reported fraud scheme in almost all of the major frequency departments. Unless you know how to find and defeat corruption or any other type of fraud, your business is at risk.
Some of this information is dated from our original writing of this post but the facts are still the same. The numbers have increased.
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(While this issue may not directly be related to current services offered by UCMJ Investigations, the issues are relevant to the continued viability of your legal firm. they derive from our archived articles and are presented as a public service.)