According to the 2002 Report to the Nation - Occupational Fraud and Abuse, “Certified fraud examiners estimate that six percent of revenues will be lost in 2002 as a result of occupational fraud and abuse. Applied to the U.S. Gross Domestic Product, this translates to losses of approximately $600 billion, or about $4,500 per employee.”

“Occupational fraud” is defined as the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employee organization’s resources or assets.

The Report is available at free of charge at www.cfenet.com, and focuses on the cost of occupational fraud and abuse, the methodologies, the victims, the perpetrators, and the legal outcomes of fraud cases.

The average company loss due to asset misappropriation was $80,000. Fraudulent financial statements resulted in significantly greater losses. The average loss resulting from fraudulent financial statements was $4,250,000.

Consider the recent financial impact of losses incurred due to creative accounting practices applied to the financial statements of Enron, Tyco, Worldcom and Qwest.

As a business owner or manager, when was the last time you considered your exposure to employee embezzlement and theft? There are usually two major factors that can cause an employee, who has otherwise been an honest and trusted employee, to suddenly become involved in an embezzlement or theft.

The first is involvement with drugs by either the employee or one of the employee’s loved ones; the second is pressure created by an economic downturn. The typical perpetrator is a first-time offender.

When proper, consistent accounting procedures are not in place, employees can learn to manipulate the accounting system to their benefit. Unfortunately, once your financial records have been altered, discovering problems is extremely difficult. The average scheme in the study lasted 18 months before it was detected.

Experience has shown that when a significant embezzlement or theft is discovered, it is usually a situation where the employee is a trusted person who has been with the company for an extended period of time. The employee has an exemplary work record, is dedicated and is considered to be a “company person.” Additionally, if an employee did not have the implicit trust of the employer, the embezzlement or theft might not occur. The breakdown in the internal control creates a situation where the dishonest employee can manipulate the system.

Typically, the employer is extremely busy and does not have time to get involved in the accounting department. Also, smaller companies usually lack numerical depth in their accounting department, which precludes the implementation of strong internal control procedures. When you combine the previous factors with the employer’s feeling of total trust in the employee, the situation can prove to be very dangerous.

Many business people are not aware that the scope of a typical accounting engagement with a Certified Public Accountant does not include specific services relating to the discovery of employee fraud. The most common method for detecting occupational fraud is by a tip from an employee, customer, vendor, or anonymous source.

The second most common method is by accident. Organizations with “fraud hotlines” cut their fraud losses by approximately 50 percent.

If you suspected that one of your employees was involved in occupational fraud, would you know what to do? An erroneous allegation could tarnish the reputation of an innocent employee, and could result in a lawsuit for your Company.

Last fall, a seasoned colleague told a group of CPA’s at the annual State Society Fraud Conference of a client who was a hardware store owner in Idaho. Years ago, the client determined his bookkeeper was skimming cash out of the daily bank deposits. When confronted, the employee gave the typical story of personal hardship. Feeling pity, the business owner told the employee she could keep her job, as long as she paid back all she had stolen over time. At the end of the day, the employee met with her attorney, and the business owner was sent to jail for extortion.

In another case that occurred over five years ago, a Spokane physician suspected he had areas of concern after completing an Internal Financial Control Checklist provided to him by his CPA. He told his staff that their CPA was coming in the next day to look over the financial records. The following day, his office manager did not come to work and to this day, the authorities have not been able to locate her.

If your company does not perform background checks on new employees, it is entirely possible she is working for you right now.

Therefore, if you suspect an employee is stealing from your company, it is recommended that you contact legal counsel who has bona-fide experience in cases dealing with occupational fraud and abuse. In addition, you should contact your insurance company for guidance, if your employees are bonded. If your employees are not bonded, consider the need for bonding insurance.

It is of critical importance that every employer focuses on his or her exposure to potential employee fraud. It is unfortunate, however, that few business people consider this potential for loss in their own operations. It is not until after such a theft is discovered that most employers become sensitive to their own exposure.

(Editor’s note: Chris Mutchler is a Certified Public Accountant with the firm of Southard, Beckham, Atwater and Berry, CPA, PS in Port Orchard. He can be reached at 360-876-4491, or cmutchler@sbabcpa.com.).