Phony expense reports, stolen cash, and billing schemes top the list of the most common types of occupational fraud worldwide, according to the 2018 Report to the Nations on Occupational Fraud and Abuse from the Associated of Certified Fraud Examiners (ACFE) ― the world’s largest anti-fraud organization. The ACFE based the findings for their 10th edition of this survey on data from 2,700 occupational fraud cases, in which total losses exceeded $7 billion. (Occupational fraud is that which is committed against an organization by its own officers, directors or employees.)
The study highlights consistent worldwide trends and patterns of fraud, illustrating its global impact. The study results are consistent with previous years’ findings that show fraud committed by those most trusted by the organization can cause the greatest harm.
Among the findings:
Employees stealing or misusing company assets posed the greatest threat because of the frequency and size of the loss. The study found that nearly 89 percent of cases involved theft or abuse of company resources and had a median loss of $114,000. These frauds were typically false billing schemes, stealing cash, and falsifying expense reports.
Tips were the most common initial detection method. It is not surprising that employees were the greatest source of tips (51 percent). Additionally, tips reported by outside parties, such as vendors and customers, cannot be overlooked; they accounted for nearly one-third of the reports.
Fewer cases were referred to law enforcement. Over the past 10 years, occupational fraud referrals to prosecution have declined from 69 percent in 2008 to 58 percent in 2018, so it is not surprising that only 4 percent of fraudsters had prior fraud convictions. The top reason for non-referrals was fear of bad publicity.
Fraudsters who had been with their companies longer steal twice as much. Employees with tenure of less than five years caused losses of $100,000, while those with more than five years caused losses of $200,000. A possible explanation of this relationship is that long-standing employees are often more trusted and promoted to positions of greater authority.
Data monitoring and surprise audits were key anti-fraud controls preventing millions in losses for businesses. Companies that implemented monitoring and analysis techniques detected frauds in half the time and suffered 52 percent less in fraud losses when compared to companies without these controls. Surprise audits had similar results with 54 percent faster detection and 51 percent lower losses.
Internal control weaknesses contributed to nearly half of the frauds. Consistent with previous surveys, the lack of internal controls, override of existing controls, and lack of management review were the main reasons fraud occurred within victim organizations. Correcting internal control deficiencies are typically inexpensive solutions that can save companies millions.
When fraudsters work together, known as collusion, losses were exponentially more damaging to victim organizations. Frauds committed by a single perpetrator cost $74,000 compared to $339,000 when there was collusion of three or more people. One reason for the increased losses may be that perpetrators who work together can circumvent otherwise well-designed internal controls.
The median fraud loss per case was $130,000, and nearly one-quarter of cases had losses of at least $1 million. This price tag does not include indirect costs, such as reputational harm or loss of stakeholder relationships, so the true total loss is likely much larger.
Small businesses lost almost twice as much per fraud as large businesses. The median loss suffered by small organizations (those with fewer than 100 employees) was $200,000, compared to $100,000 that was incurred by the largest organizations (those with more than 10,000 employees). Smaller organizations are victimized by fraud because they typically lack anti-fraud controls compared to their larger counterparts.
Behavioral red flags cannot be overlooked because nearly 85 percent of fraudsters exhibited at least one warning sign. Commonly displayed characteristics were living beyond their means, encountering financial difficulties, and/or having an unusually close relationship with a vendor or customer. Gender also played a role in specific red flags. Females had higher tendencies to commit fraud when faced with financial difficulties and family problems when compared to their male counterparts. Men committing fraud were more likely to have close relationships with customers/vendors and/or wheeler-dealer attitudes.
Fraud is a significant problem for businesses and other organizations worldwide. The typical organization loses 5 percent of its revenues to occupational fraud each year. This type of fraud is costly and damaging to an organization’s bottom line, as well as its reputation. It is essential to take proactive measures to prevent fraud, such as assessing specific fraud risk and implementing a fraud prevention program. Instead of overlooking common red flags, businesses should contact an anti-fraud professional or launch an internal investigation to analyze the issue.
If you have questions about fraud or solutions to combat it, please reach out to a KraftCPAs representative. We’re happy to assist you.