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, the perpetrator, 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 all organizations that often bears a two-fold consequence for the organization—an economic loss and betrayal. Oftentimes, the financial loss impacts the business operations, the services the organization seeks to provide, and/or the organization’s overall mission. There is also the emotional effect as a result of the betrayal felt by an organization and its team depending on who the perpetrator is.
ACFE’s latest Occupational Fraud 2024: A Report to Nations identifies the factors and the devastating impact of occupational fraud. This latest report analyzes the frauds that were investigated between January 2022 and September 2023, post-COVID. The report covered 1,921 cases from 138 countries resulting in losses of more than $3.1 billion. Based on this latest study certified fraud examiners (CFEs) estimate that organizations lose 5% of revenue to fraud annually with an average loss per case of $1.7 million.
Categories of Occupational Fraud
The ACFE identifies the following categories of occupational fraud:
- Asset Misappropriation—most common but least costly.
- Corruption—almost half the cases included corruption.
- Financial statement fraud—least common but most costly.
Asset misappropriation cases involve an employee stealing or misusing the organization’s resources, is the most common, with 89% of cases. Asset misappropriation tends to cause the lowest median loss at $120,000 per case. Corruption cases cause a median loss of $200,000 per case. Financial statement fraud is when the perpetrator intentionally caused a material misstatement or omission in the organization’s financial statement. Only 5% of cases involved financial statement fraud but they also included the costliest losses—with a median loss of $766,000 per case, nearly a 30% increase compared to ACFE’s last report in 2022. Even though these three categories are identified, 38% of the cases involved more than one of these types of fraud with the most common overlap occurring with asset misappropriation and corruption.
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 $60,000, and owners/executives committed 19% of the fraud cases with a median loss of $500,000.
Fraudsters’ Concealments
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
Impact Based on Industry
The industries affected by the greatest number of cases in the study were banking and financial services, manufacturing, and government and public administration. Banking/financial services had 305 cases with a median loss of $120,000; manufacturing saw 175 cases with a median loss of $267,000; and government had 171 cases with a median loss of $200,000. The highest median losses were reported in the mining and wholesale trade sectors with median losses of $550,000 and $361,000, respectively. Across all industries responding, corruption was the most common fraud scheme with billing as the second most common and checking and payment tampering in third.
Lessons to Learn
Based on this recent study and previous year’s studies, what can we learn from all these overwhelming and daunting statistics? One lesson is knowing the most common methods in which fraud is detected. With employees accounting for reporting fraud in 52% 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 – 43% (received primarily via e-mail, web-based/online form and hotline)
- Internal audit – 14%
- Management review – 13%
The study indicates maintaining a hotline—email and/or online reporting forms—taking over telephone hotlines since 2018 is an important mechanism to have in place. Some organizations, including in 3% of cases in this report, are also now providing text messaging as a reporting mechanism.
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
- Anti-fraud training for employees
- Anti-fraud training for managers/executives
Contact Us
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.
