Occupational Fraud, Committed by Your Own Employees

12 January 2021

Due to fraud committed by employees, also called occupational fraud, companies lose about 5% of their revenue each year, globally.

Corporate subsidiaries and multinational companies present in Romania have better developed fraud & risk management departments than national companies do, most likely due to the know-how borrowed from their mother companies, in terms of regulating specific internal protection measures.

But with the migration of employees from foreign to local companies, there took place a transfer of experience, parallel to the domestic companies’ growth of interest in developing their own specialized structures in risk management, fraud prevention and internal control.

For example, if 5 years ago we could talk about a smooth cooperation only with the multinational entities, now we can find almost the same level of professionalism and training among Romanian companies in terms of anti-fraud investigations and fraud risk management.

The perception and understanding of the fraudulent phenomenon is different depending on each state’s level of economic development. Given that the Romanian economy has strongly developed lately, companies in our country have become increasingly aware and more receptive to developing their own capabilities for anti-fraud and defence investigations, which can be interpreted as proof of awareness of the vulnerabilities to which companies are exposed as the business develops.

One aspect we draw attention to is that the preventive approach continues to be ensured only by the result of the offensive actions. Specifically, even if significant progress has been made in understanding the fraudulent phenomenon and the risks it generates, the business climate in our country still doesn’t strengthen its internal security strictly through preventive measures. That is a paradox, since prevention is less expensive than the financial, operational or reputational damage caused by fraudulent actions taken on these companies.

Fraud is just as harmful, regardless of the area in which it occurs and the risk of employee fraud in Romania is not higher than in other EU countries. Therefore, our country is not much more exposed to fraud risks than other more economically developed countries.

SPIA’s cooperation relations and the experience exchange we had with other corporate anti-fraud investigation agencies from EU member countries and not only, showed us that the typology of the managed issue is evenly distributed, the only major differences being registered in countries with a certain economic specificity. For example, a multinational operator present in several countries will face many more problems in areas where its services are more expensive, and the possibilities for illicit gain are more attractive to the local organized crime groups.

The investigative efforts by the domestic anti-fraud departments and private investigations agencies, along with those of the law enforcement agencies, have led to an increased level of awareness of the consequences of violating the law, especially in terms of the success rate and popularized results in the media.

Romania has become one of the most demanding countries in terms of penalties for economic fraud, which has improved the awareness level of people prone to fraudulent activities.

It would be good if the internal measures the managers are taking in order to prevent and discourage the fraud risk in the departments they lead, keep a balance between the limits that ensure the employees’ professional comfort and their need to impose those prevention and control measures.

The existing corporate anti-fraud departments already have procedures and activities carried out both for preventive and offensive purposes. For example, the positive results obtained by the anti-fraud department are popularized without mentioning the name within the company, precisely in order to discourage manifestations of the same nature. On the other hand, when we talk about a reputational risk, in most cases we are already talking about the operationalization of some offensive measures, being almost clear that the preventive ones have failed.

After the financial damage, the reputational damage is one of the most severe effects that fraud can have on a company. Beyond an immediate loss, the risk of an image crisis with medium and long-term effects, is high. Factors that financially damage a company have a real chance to damage its public image and reputation, as well. The company going through the crisis must avoid the risk of being transformed from the positive character to the negative one, in regards of perception among stakeholders. For this reasons, the SPIA experts offer crisis communication services,in order to protect the company’s reputation.

In our anti-fraud investigations, the first place in a rank of the biggest occupational frauds, depending on the damage, is occupied by the fraud in procurement or investment procedures, due to the high values ​​of damages. Distortion of real competition by drawing up restrictive specifications that limit participation in certain bidders, artificially increasing investment costs or the acquisition or fictitious performance of services, all fall within the range of the most important problems discovered by SPIA investigators.

On the other hand, with a much higher incidence but with less damage, there are frauds in simple form that are not subject to such rigorous control, do not require a very high level of specialization and fall within the level of losses that companies know and assume. Some examples are fuel consumption, supplies misuse, use of the work schedule for other purpose than professional, use of the company’s human and material resources in private, interest or exaggeration of the amount of recurrent expenses, so on and so forth.

To our surprise, in our investigations we did not find extensions of organized crime groups in other countries than the one where the fraud took place. The levels of control established by the EU probably make a cross-border criminal resolution much more visible than one that takes place locally. We have not yet clarified why, but compared to other years, the investigated issues take place on national territory. This feature can only make us happy because, usually, international cooperation is both expensive and difficult.