Filed under: Fraud Disputes & Litigation

Fraud continues to be a rampant epidemic and a terrible economic reality. If occupational fraud were a country, it would have a national economy ranking in the top-10 across the globe.

Thankfully, we have resources like the Association of Certified Fraud Examiners (ACFE) to provide knowledge about the problem and tools to assist in our defenses.  Every two years, the ACFE publishes its Report to the Nations on occupational fraud.  Occupational fraud is very different from other forms of fraud. It relates to “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”

Based on the ACFE’s study, by extrapolation this variety of fraud alone has created a $3.7 trillion annual problem worldwide.  The study has fascinating statistics for how fraud is perpetrated, who is doing it, where is it happening, and how is it getting caught.  Not only that, but it also helps identify which preventive measures are the most effective, and it provides an effective Fraud Prevention Checklist that will help you get a fraud prevention program under way.

The ACFE has been conducting this study since 1996, and the results are remarkably consistent from study to study.  Despite the evolving methods available to fraudsters to obtain their ill-gotten funds, the path to fraud remains relatively the same and the methods used to detect/prevent it are just as effective today as they have been, if you use them.

The good news for companies looking to shore up their defenses is that there are proven tools available to you.  I encourage you all to read the study and consider its suggestions for your company.  Here are a few highlights from this study and its predecessors:

  • On average, 5% of a company’s top-line revenue is lost to fraud every year.  That is noted in the 2014 study and has been a consistent metric over the years.
  • Tips, most commonly surfaced by a 24×7 fraud hotline, are by far the most common way fraud is uncovered.  Someone out there, an employee, a customer, a vendor, knows what is going on and all they need is an anonymous and protected mechanism to speak up.
  • Organizations that used hotlines experienced frauds that were 41% less costly and detected them 50% more quickly than those organizations experiencing fraud that did not employ a hotline.
  • The most effective controls are often overlooked by victim organizations.  For example, only 35% of victim organizations used proactive data monitoring in their control regiment, but the presence of these controls was correlated with frauds that were 60% less costly and 50% shorter in duration.  Read the study and find out which others are highly effective!
  • The vast majority of frauds are perpetrated by first-time offenders.  Only 5% of offenders had been previously convicted of a fraud-related crime, while 82% had never previously been punished or terminated for fraud-related conduct.  This proves that good people can do the wrong thing under the right circumstances (new costs associated with kids in college or ailing parents, too much debt, any variety of addiction issues, or other financial pressures).  Know your people and what is going on in their lives!
  •  Smaller businesses are doubly vulnerable to fraud.  They not only have fewer resources to and personnel to insert into a fraud prevention program, but they also have less capital available to recover from even a modest fraud (median fraud was $145,000).
  • Passive detection methods (confession, notification by law enforcement, external audits, or by accident) tend to take longer to bring to management’s attention, which allows the related loss to grow.  You must be intentional and implement specific fraud prevention/detection controls to have a fighting chance at fighting fraud.
  • It takes a lot of time and effort to recover fraud losses.  According to the ACFE study, 58% of organizations experiencing fraud didn’t recover any of their losses and only 14% recovered all of their losses.

One last note from a practitioner who has seen far too many victim companies impacted by fraud; the cost of fraud is like the proverbial iceberg.  The direct losses – the dollars diverted from the company coffers and into the pockets of the perpetrator(s) – are the piece you see floating above the water.  They are significant in and of themselves, but pale in comparison to the rest of the invisible iceberg under the water’s surface.  The costs to investigate the incident, remedy ineffective controls, fight to recover the losses, opportunity costs of your employees, and then the immeasurable loss of trust in the accounting function can equate to a Mt. Everest-sized portion of the unseen iceberg.

© Clark Nuber PS and Focus on Fraud, 2014. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Focus on Fraud with appropriate and specific direction to the original content.

This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.