According to the Association of Certified Fraud Examiners (ACFE), “fraud” is any activity that relies on deception to achieve a gain. Those individuals committing fraud achieve a gain, and the victim—either a business, government entity, or organization—suffers a loss. Fraud is an ever present and ever evolving threat to any organization that often bears a two-fold consequence for the organization. The first being the economic loss. Typically, the financial loss impacts the business operations, the services the organization seeks to provide, and/or the organization’s overall mission. The second consequence is the betrayal felt by an organization and its team depending on the person committing the fraud.
The ACFE’s latest Occupational Fraud 2022: A Report to Nations seeks to identify the factors and the toll of occupational fraud. This latest annual report explores the frauds that were investigated primarily during the global COVID pandemic. The report covered 2,110 cases from 133 countries resulting in losses of more than $3.6 billion. Based on this latest study certified fraud examiners (CFEs) estimate that organizations lose 5% of revenue to fraud annually.
Categories of Occupational Fraud
The ACFE identifies the following categories of occupational fraud:
- Asset Misappropriation
- Financial statement fraud
Asset misappropriation, which involves an employee stealing or misusing the employer’s resources, is the most common, with 86% of cases falling under this category. The asset misappropriate schemes that pose the greatest risk include billing and noncash. Asset misappropriation tends to cause the lowest median loss at $100,000 per case. Financial statement fraud is the least common at 9% but results in the costliest losses—with a median loss of $593,000 per case.
Who Is Committing the Fraud?
The survey identifies four levels of perpetrators—employee, manager, owner/executive, and other—and reveals that there is a strong correlation between the level of authority and the size of the fraud. Employees committed 37% of the frauds with a median loss of $50,000, and owners/executives committed 23% of the fraud cases with a median loss of $337,000.
In looking at how fraudsters are concealing their deceptions, the top five methods are as follows:
- Creating fraudulent physical documents
- Altering physical documents
- Creating fraudulent electronic documents/files
- Altering electronic documents/files
- Destroying or withholding physical documents
Forty-eight percent of executive level perpetrators destroyed evidence, and 61% of managers created fraudulent evidence. And there were even 12% of cases that did not involve any attempt to conceal the fraud.
Changes in the Past Decade
Looking at the past decade, frauds are getting exposed quicker and causing smaller losses for organizations and businesses with median losses down 16% since 2012 and median duration down by 33%. One evolution within those 10 years is cryptocurrency. Eight percent of fraud cases involved the use of cryptocurrency either for bribery or kickback payments (48%) or converting misappropriated assets (43%).
Impact Based on Industry
The industries affected by the greatest number of cases in our study were banking and financial services, government and public administration, and manufacturing. Banking had a median loss of $100,000 with 351 cases; government had a median loss of $150,000 with 198 cases; and manufacturing saw a median loss of $177,000 with 194 cases. However, the highest median losses were reported in the real estate and wholesale trade sector with median losses of $435,000 and $400,000, respectively. Across all industries responding, corruption was the most common fraud scheme. Billing was the second most common for government and manufacturing, and for banking the second most common was cash on hand and checking and payment tampering.
Lessons to Learn
Based on this recent study and previous year’s studies, what can organizations learn from all these overwhelming and disheartening statistics? One step is knowing the most common methods in which fraud is detected. With employees accounting for reporting fraud in 55% of the cases, organizations should make sure there are mechanisms in place for employees to report fraud. The top three ways that occupational fraud is detected:
- Tip – 42% (received primarily via e-mail, web-based/online form and hotline)
- Internal audit – 16%
- Management review – 12%
The study indicates maintaining a hotline or reporting mechanism for employees catches fraud earlier reducing losses. Fraud losses were 2x higher where no hotline existed. And those with hotlines detected fraud on average in 12 months rather than 18 months for those organizations without hotlines. It was also identified that nearly half of the fraud cases occurred due to lack of internal controls or an override of existing controls.
For those organizations that did experience fraud, the most common changes they made following the fraud involved implementing or modifying:
- Management review
- Proactive data monitoring
- Surprise audits
- Internal audit department
- Anti-fraud training
The information outlined in the survey provides important details Chicago businesses and organizations can use to review, update, and enhance fraud prevention programs and internal controls. If you have questions about the information outlined above or for assistance with an issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us.