United States

Occupational fraud and private clubs: Part I


In the September 2012 issue of this newsletter, reference was made to the latest version of the benchmark fraud study from the Association of Certified Fraud Examiners (ACFE). At more than 270 pages, the 2012 Report to the Nations on Occupational Fraud and Abuse can be difficult to digest.  However, as one might expect, the biannual publication provides incredibly valuable insight, supported by real-world statistics, into the various facets of fraud. The McGladrey private club industry service team has been immersed in the report over the last few months, as it delivered approximately thirty anti-fraud training sessions to private club leaders and key department heads. Over the next few editions of this newsletter, highlights from each section of the report will be explored, in regards to how they might relate to the private club environment.

For purposes of this discussion, the major sections of the report are essentially focused on: the cost of occupational fraud; how it is committed; how frauds are detected; the profile of the organizations falling victim to fraud, including a discussion of their controls; and details regarding the fraud perpetrators.

The cost of occupational fraud

It is vital to have some idea of the size of the problem, in order to devote sufficient time and resources to combating it. Based on the findings in the report, it is estimated that the typical organization loses 5 percent of its annual revenues to occupational fraud. For a private club with $5 million in operating revenues, that means, on average, $250,000 is lost each year to occupational fraud. That is a shocking amount that only increases in clubs with higher revenue levels. Even if the 5 percent factor is an overstatement, consider if the actual number is closer to 2 percent; that is still $100,000 of revenue lost to occupational fraud. This is clearly a problem that cannot be readily dismissed.

In the private club world, not unlike many industries, the size of the fraud problem is likely underreported, either because some fraud is undetected, or that which is detected is dealt with in a very private manner. With today’s constant struggle to find and retain members, no club needs the negative press associated with a fraud at their property. Attempts to claim on insurance coverage if a fraud occurs will often require a club to file a police report, which often can lead to the story making it to the local press. Clubs need to weigh the opportunity cost of perhaps losing a new member due to the adverse publicity from a fraud against any possible insurance proceeds.

How occupational fraud is committed

Perhaps it is easier to understand why the 5 percent fraud loss factor is so large if there is an understanding of the myriad of schemes through which fraud can be perpetrated. The report notes that occupational fraud schemes consistently fall into three broad categories: asset misappropriation, corruption and financial statement fraud. Next month’s newsletter will take a closer look at each of these categories, and consider how they apply to private clubs.