Why Your Business Needs to Protect Against Executive Fraud
You may trust your executive management team implicitly. But the research is clear: In organizations where executives turn to fraud, the results are very costly. According to the Association of Certified Fraud Examiners’ (ACFE’s) Occupational Fraud 2024: A Report to the Nations, owner/executive fraud makes up only 19% of all cases but has a median loss of $459,000 per incident. That compares with $60,000 per incident for nonmanagerial employees.
Part of the reason behind such great financial losses is the fact that it generally takes longer to detect fraud perpetrated by executives (24 months vs. eight months for rank-and-file worker schemes). So the more proactive you are about preventing and detecting occupational fraud at the highest levels, the better.
3 factors
You might start by considering how the “fraud triangle” paradigm (which forensic accountants use to understand the incidence of occupational fraud) applies to executives.
The triangle’s first element is pressure. Executives can face lifestyle pressures — for example, to live in an exclusive neighborhood and drive an expensive car, even if they can’t afford them. They may also feel pressure to pump up sales numbers or falsify financial statements to make their companies (and their own performance) look better.
The second factor is opportunity. As high-ranking employees, executives generally have the power and authority to steal or cheat. This is particularly true if their company doesn’t enforce adequate internal controls.
The last leg of the triangle is rationalization. Executives who steal may think “everybody does it” or that they “deserve” more than they legitimately earn. Substance abuse or gambling issues may also interfere with their judgment.
Controls that cover everyone
Internal controls are critical to preventing all occupational fraud. But you may need to take extra steps to help ensure executives don’t override internal controls. Clearly communicate when overrides are permissible and when they’re not. If an executive believes an override is necessary, that person should be required to get a second executive’s opinion or document the incident.
Also mandate fraud training for all employees — no exceptions. And empower workers to anonymously report suspicions about executives and other managers by providing a third-party fraud hotline (or online portal). You can help ensure the integrity of your hotline and protect whistleblowers by limiting access to any tips.
Other controls include:
Giving auditors access. Whether your company has an internal audit team, outside auditors — or a combination of both — give them full access to your company’s records. If the audit team encounters a roadblock or is denied access to information, they should know how to proceed.
Treating every allegation seriously. Sometimes tips involving executives are ignored or result in less rigorous investigations. To ensure an unbiased investigation, engage an external fraud expert to look into every legitimate-seeming allegation.
Taking legal action. The ACFE has reported that executives generally receive less punishment for fraud offenses than other employees. Organizations may avoid civil litigation or criminal prosecution for fear of bad publicity. However, if you allow executives to steal or falsify information without ramifications, it could embolden other would-be perpetrators.
Demographic data
Not surprisingly, schemes perpetrated by individuals with 10 or more years tenure are much more expensive than those perpetrated by individuals with even six to 10 years tenure (median losses of $250,000 vs. $137,000, respectively). Also, although every case is unique, occupational fraudsters are more likely to be men with at least a college degree and between 31 and 50 years old. Such characteristics are common among executives.
Although members of your leadership team are almost certainly trustworthy and dedicated to your business’s success, you need to foil potential rogue actors with strong controls. We can help.
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