You may fully trust your executive team, but research shows that executive level fraud can be extremely costly. According to the Association of Certified Fraud Examiners’ (ACFE) Occupational Fraud 2024: A Report to the Nations, fraud committed by owners or executives accounts for only 19% of all cases but results in a median loss of $459,000 per incident. In contrast, the median loss for fraud by non-managerial employees is just $60,000 per case. 
One reason for the higher financial losses from executive fraud is that it typically takes much longer to detect—on average, 24 months compared to eight months for fraud committed by lower-level employees. The more proactive you are in preventing and identifying fraud at the executive level, the better.
Understanding Executive Fraud Through the Fraud Triangle
To understand why executives commit fraud, consider the “fraud triangle,” a model used by forensic accountants to explain occupational fraud.
- Pressure: Executives often face financial or lifestyle pressures, such as maintaining an expensive lifestyle they can’t afford. They may also feel compelled to inflate sales numbers or falsify financial statements to make the company, and their own performance, appear more favorable.
- Opportunity: Executives usually have more authority and access to company assets, making it easier for them to exploit weak internal controls. This creates opportunities to commit fraud undetected.
- Rationalization: Executives who commit fraud may justify their actions by believing that “everyone does it” or that they deserve more than their legitimate earnings. Personal issues such as gambling or substance abuse can also cloud their judgment.
Implementing Controls to Prevent Executive Fraud
Strong internal controls are essential for preventing all types of occupational fraud, especially at the executive level. However, additional steps may be needed to ensure executives can’t override these controls. Clearly communicate when management overrides are allowed and require any executive seeking an override to obtain a second opinion or document the decision.
It’s also important to mandate fraud awareness training for all employees, including executives. Encourage employees to report any suspicions, even about upper management, by providing a third-party fraud hotline or online reporting portal. To maintain the credibility of the hotline and protect whistleblowers, restrict access to reported tips.
Additional measures include:
- Providing auditors with full access: Whether you use internal auditors, external auditors, or both, ensure they have unrestricted access to company records. If auditors encounter obstacles, they should know how to proceed.
- Taking every allegation seriously: Allegations involving executives should be thoroughly investigated. To ensure impartiality, hire external fraud experts to investigate credible claims.
- Pursuing legal action: The ACFE reports that executives often receive lighter penalties for fraud than lower-level employees. Companies may avoid legal action due to concerns about bad publicity. However, failing to hold executives accountable can encourage further misconduct.
Fraud Demographics
It’s no surprise that fraud schemes committed by individuals with 10 or more years of tenure are costlier than those by employees with six to 10 years of tenure (median losses of $250,000 vs. $137,000). Also, occupational fraudsters are more likely to be male, have a college degree, and be between 31 and 50 years old—characteristics common among executives.
Even if your leadership team is trustworthy and dedicated to your business’s success, you must guard against potential rogue actors by implementing strong internal controls. We can help you establish these safeguards.
