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Report: Fraud Loss at $3.7 Trillion Globally

Jaclyn Jaeger | May 27, 2014

Occupational fraud costs companies an estimated 5 percent of their revenue annually, according to the latest data from the Association of Certified Fraud Examiners. Applied to the estimated Gross World Product, this figure translates to a potential projected global fraud loss of more than $3.7 trillion.

First published in 1996, the ACFE's Report to the Nations helps compliance departments to justify budgets and satisfy performance metrics. The ACFE's latest report surveyed fraud examiners in more than 100 countries and examined 1,483 cases of fraud from October 2013 to December 2013.

The median loss caused by occupational fraud in the ACFE study was $145,000, with 22 percent of the cases involving losses of at least $1 million.

The smallest organizations tend to suffer disproportionately large losses due to occupational fraud. Additionally, the specific fraud risks faced by small companies differ from those faced by larger organizations, with certain categories of fraud being much more prominent at small entities than at their larger counterparts.

For example, check tampering schemes occurred in 22 percent of small business cases, but only 7 percent of cases in larger organizations. In addition, payroll and cash larceny schemes were found to occur twice as often in
small businesses as in larger businesses.

       

Similar to findings in ACFE's prior reports, industries that are most commonly victimized were the banking and financial services, government and public administration, and manufacturing sectors. Mining, real estate, and oil and gas industries had the largest reported median losses.

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 18 common anti-fraud controls experienced considerably lower losses and time-to-detection than those lacking these controls.

Anti-fraud controls didn't help, however, in instances of collusion, which often enables employees to steal larger amounts of money. Where the median loss in a fraud committed by a single person was $80,000, median losses skyrocketed to $200,000 for fraud perpetrated by two individuals; $355,000 for three perpetrators; and more than $500,000 when four or more perpetrators were involved.

In the majority of these cases, the damages are irreparable. The study found that 58 percent of companies had not recovered any of the fraud losses, and only 14 percent were able to fully recover their losses.

The report also found a correlation between the detection method, median loss, and median duration of occupational frauds. Frauds that were discovered by accident tended to last the longest, with a median duration of 32 months, and had a median loss of $325,000. Schemes that were first detected by notification from law enforcement caused the highest median loss at $1.2 million and had a median duration of 30 months.

Whistleblower Hotlines

The report also found that whistleblower hotlines continue to be an essential tool for detecting fraud. Yet, many companies still don't have such a mechanism in place, indicating room for improvement when it comes to uncovering fraudulent conduct.

According to the report, occupational fraud was detected through tips from insiders more than twice the rate of any other method (42 percent) in 2013, and most of those tips came from employees. The second and third most common ways that companies detected fraud was through management review (16 percent) and internal audit (14 percent). These findings are similar to ACFE's reports conducted in 2010 and 2012.

Organizations with hotlines experienced frauds that were 41 percent less costly, and they detected frauds 50 percent more quickly. Of organizations victimized by fraud, only 54 percent had a hotline mechanism in place, and less than 11 percent provided rewards for whistleblowers. “These rates indicate that many organizations have room for improvement in encouraging the tips that so effectively help uncover fraudulent conduct,” the report stated.

Additionally, although external audits are implemented by a large number of organizations, they are among the least effective controls in combating occupational fraud. Such audits were the primary detection method in just 3 percent of the fraud cases, compared to the 7 percent of cases that were detected.

Perpetrators of Fraud 

Perpetrators with higher levels of authority tend to cause much larger losses. Although owners and senior-level executives accounted for just 19 percent of all cases, they caused a median loss of $500,000.  

In comparison, lower-level employees committed 42 percent of occupational frauds, causing a median loss of $75,000. Managers ranked in the middle, committing 36 percent of frauds with a median loss of $130,000.

The vast majority (77 percent) of all frauds in the ACFE study were committed by individuals working in one of six departments: accounting, operations, sales, executive/upper management, customer service, and purchasing.

The report further noted that most occupational fraudsters are first-time offenders with clean employment histories; only 5 percent had been convicted of a fraud-related offense prior to committing the crimes in the ACFE study. Furthermore, 82 percent of fraudsters had never previously been punished or terminated by an employer for fraud-related conduct.

“While background checks can be useful in screening out some bad applicants, they might not do a good job of predicting fraudulent behavior,” the report stated. “Most fraudsters work for their employers for years before they begin to steal, so ongoing employee monitoring and an understanding of the risk factors and warning signs of fraud are much more likely to identify fraud than pre-employment screening.”

In 92 percent of cases, the fraudster displayed one or more behavioral red flags that are often associated with fraudulent conduct. These include:

  • Living beyond means (44 percent of cases);
  • Financial difficulties (33 percent);
  • Unusually close association with vendors or customers (22 percent); and
  • Excessive control issues (21 percent).

“Managers, employees, auditors, and others should be trained to recognize these warning signs that, when combined with other factors, might indicate fraud,” the ACFE report stated.