In the world of commerce, organizations incur costs to produce and sell their products or services. These costs run the gamut: labor, taxes, advertising, occupancy, raw materi- als, research and development—and, yes, fraud and abuse. The latter cost, however, is fundamentally different from the former: The true expense of fraud and abuse is hidden, even if it is reflected in the profit and loss figures.
For example, suppose the advertising expense of a company is $1.2 million. But un- known to the company, its marketing manager is in collusion with an outside ad agency and has accepted $300,000 in kickbacks to steer business to that firm. That means the true advertising expense is overstated by at least the amount of the kickback—if not more. The result, of course, is that $300,000 comes directly off the bottom line, out of the pockets of the investors and the workforce.
DEFINING OCCUPATIONAL FRAUD AND ABUSE
The example just given is clear-cut, but much about occupational fraud and abuse is not so well defined, as we will see. Indeed, there is widespread disagreement on what ex- actly constitutes these offenses.
For purposes of this book, “occupational fraud and abuse” is defined as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplica- tion of the employing organization’s resources or assets.”1
By the breadth of the definition, it involves a wide variety of conduct by executives, employees, managers, and principals of organizations, ranging from sophisticated in- vestment swindles to petty theft. Common violations include asset misappropriation, fraudulent statements, corruption, pilferage and petty theft, false overtime, using com- pany property for personal benefit, and payroll and sick time abuses. As the first Report to the Nation on Occupational Fraud and Abuse, set forth in 1996, states, “The key is that the activity (1) is clandestine, (2) violates the employee’s fiduciary duties to the or- ganization, (3) is committed for the purpose of direct or indirect financial benefit to the employee, and (4) costs the employing organization assets, revenues, or reserves.”2
“Employee,” in the context of this definition, is any person who receives regular and periodic compensation from an organization for his or her labor. The term is not re- stricted to the rank and file, but specifically includes corporate executives, company presidents, top and middle managers, and other workers.