Business Plan Basics

Occupational Fraud

Occupational FraudWhen we think of fraud, often big news-item stories come to mind. Bernie Madoff's ponzi scheme, Ken Lay and Jeff Skilling's 53-count trial regarding what they did at Enron, and the like are the sorts of things that people often hear about. What they don't hear about, however, are the millions of little frauds that occur in business every day, and they're often less dramatic or and much easier to detect if you know what you're looking for.

To begin, let us define an "occupational fraud" as a fraud that is done quickly and easily within the company. They are, by definition, internal in nature, which means that they are perpetuated by your employees. This is not to suggest that you should distrust your employees, but rather that you should be aware of the types of things that may be happening and what signs to look for. Occupational fraud includes things like check fraud, revenue skimming, and false invoicing.

Usually an employee commits occupational fraud when four factors exist: motive, means, opportunity, and rationalization. Motive, to an extent, should be obvious, but is rarely the accumulation of money in general. Often the motive involves something excessive in some respect, such as outstanding debt, medical problems, or a general inability to keep up with demanding financial times, which has been largely the case these days. Means can be a highly varied category, and can include everything from the ability to work complex financial tricks to hide missing money to being able to operate the cash register. Opportunity happens when there is a lack of internal controls or misplaced trust. Finally, rationalization is the last step, where an employee convinces themselves that they are somehow right to be able to do this. Often the rationalization is something along the lines of "I don't get paid enough for the work I do."

Occupational fraud can fall into one of two categories as well: misappropriation of cash by employees and non-cash asset misappropriation by employees. In simpler terms, taking money directly, or taking items that haven't been paid for.

The former of the pair can take many forms such as simple larceny or embezzlement (stealing money that has been recorded in some respect), skimming (stealing unrecorded sales receipts), and phony disbursements (check tampering, false bills, purchasing under false names, etc.). The latter is more often seen as unauthorized use of equipment, inventory shrinkage (stealing physical inventory), and fake sales and/or purchases (pretending to sell items and then absconding with them).

Fortunately, the solution is largely the same. Start by examining your hiring practices and make sure that they're sensible and thorough. Make sure to run background checks and hire people that you think are responsible and stable. Also, place internal controls on your business. Have money counts double-checked by multiple employees, have inventory backup records, be positive that all sales have to be recorded specifically, and don't relax these procedures for any employee no matter how much you trust them since it only sets an example for others. Finally, be prepared for the worst. If you have a plan for dealing with occupational fraud, it won't be able to do as much damage to your business.

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