Not sure whistleblower hotlines are an essential tool for detection of fraud? You may want to check out the latest data from the Association of Certified Fraud Examiners.

According to the ACFE's 2012 Report to the Nations, occupational fraud was detected through tips from insiders more than by any other method (43 percent) in 2011, and most of those tips came from employees. The second and third most common ways that companies detected fraud was through management review (14.6 percent) and internal audit (14.4 percent).

                                  

The ACFE surveyed fraud examiners in 94 countries, examining 1,388 cases of fraud that occurred worldwide between January 2010 and December 2011.

The overall finding: Though some findings differ slightly from region to region, most of the trends in fraud schemes, perpetrator characteristics, and anti-fraud controls are similar regardless of where the fraud occurred.

“As in previous years, what is perhaps most striking about the data we gathered is how consistent the patterns of fraud are around the globe and over time,” James Ratley, president of the ACFE, said in a statement. “We believe this consistency reaffirms the value of our research efforts and the reliability of our findings as truly representative of the characteristics of occupational fraudsters and their schemes.”

The report additionally found that fraud schemes typically continue for months or years before they are detected. The frauds analyzed for the report lasted a median of 18 months before being discovered.

Cost of Fraud

According to the report, companies lose an estimated 5 percent of their revenue annually due to occupational fraud. Applied to the estimated 2011 Gross World Product, this figure translates to a potential projected global fraud loss of more than $3.5 trillion.

The median loss caused by occupational fraud in the ACFE study was $140,000. More than one-fifth of the frauds involved losses of at least $1 million.

                                        

High-level perpetrators do the most damage. The median loss among frauds committed by owner/executives was $573,000, the median loss caused by managers was $180,000, and the median loss caused by employees was $60,000.

The smallest companies in the report suffered the largest median losses. These companies typically employ fewer anti-fraud controls than their larger counterparts, which increases their vulnerability to fraud.

As in ACFE's prior research, the industries that are most commonly victimized were the banking and financial services, government and public administration, and manufacturing sectors.

The presence of anti-fraud controls notably correlates with significant decreases in the cost and duration of occupational fraud schemes. Companies that had implemented any of 16 common anti-fraud controls experienced considerably lower losses and time-to-detection than those lacking these controls.

The study also found that 49 percent of companies do not recover any losses that they suffer due to fraud. This finding is consistent with previous research, which found that 40 to 50 percent of companies do not recover any of their fraud-related losses.

Perpetrators of Fraud 

Perpetrators with higher levels of authority tend to cause much larger losses. The median loss among frauds committed by owner/executives was $573,000; the median loss caused by managers was $180,000; and the median loss caused by employees was $60,000.

The vast majority (77 percent) of all frauds in our study were committed by individuals working in one of six departments: accounting, operations, sales, executive/upper management, customer service, and purchasing. This distribution was very similar to what the ACFE found in its 2010 study.

The report further noted that most occupational fraudsters are first-time offenders with clean employment histories. Approximately 87 percent of occupational fraudsters had never been charged or convicted of a fraud-related offense, and 84 percent had never been punished or terminated by an employer for fraud-related conduct.

In 81 percent of cases, the fraudster displayed one or more behavioral red flags that are often associated with fraudulent conduct. These include:

  • Living beyond means (36 percent of cases);
  • Financial difficulties (27 percent);
  • Unusually close association with vendors or customers (19 percent); and
  • Excessive control issues (18 percent).

First published in 1996, the ACFE's Report to the Nations is intended to help develop benchmarking statistics on occupational fraud losses, detection methods, and perpetrators.