Report to the Nation on Occupational Fraud and Abuse
The Report to the Nation on Occupational Fraud and Abuse has been compiled since 1996. Dr. Joseph T. Wells, CFE, CPA, founder and Chairman of the ACFE, directed the publication of the first Report to obtain and analyze information provided by Certified Fraud Examiners to begin to gather statistics about the true extent of fraud and abuse. It was the first of its kind really. Before then, fraud practitioners knew fraud was a big problem but had little data to support our gut reactions and experiences. Without data, it was hard to justify expenditures needed to create and maintain an effective fraud prevention program. Organizational leadership found it difficult to allocate funds to a cause that may or may not be a real threat to their business.
Today, just 20 years later, everyone knows we now live in a world where virtually all organizations, whether business or government, understand fraud is a problem. Recognizing the threat was the important first step and this publication was and continues to be the source for educating employers and clients throughout the world.
Recently, the 2016 edition of the report came out. It was the ninth edition of the study. I thought I would provide a summary of its findings to continue to support this work and continue to raise the general level of awareness about fraud risk to all organizations.
This report contains an analysis of 2,410 cases of occupational fraud cases that were investigated between January 2014 and October 2015. The Report includes cases from around the world in a wide variety of fields. Although the US nor the Timber Industry is specifically the target of the analysis, I think we can still learn a lot about fraud in general that can be applied to our own operations.
The 2016 report shows the continuation of numerous trends that were identified during previous studies, provides information in several new areas, and highlights interesting ways that the occurrence of fraud has evolved over time and varies across regions.
Here is a summary of the results:
Geographical Location of Victim Organizations and the Median Loss (in U.S. dollars)
|· Latin America and the Caribbean
- Eastern Europe and Western/Central Asia $200,000
|· Middle East and North Africa
Size and Type of Organization
Approximately two-thirds of the cases reported targeted privately held or publicly owned companies. These for-profit organizations suffered the largest median losses among the types of organizations analyzed. The median loss suffered by small organizations (those with fewer than 100 employees) was the same as that incurred by the largest organizations (those with more than 10,000 employees). However, this type of loss is likely to have a much greater impact on smaller organizations.
Organizations of different sizes tend to have different fraud risks. Corruption was more prevalent in larger organizations, while check tampering, skimming, payroll, and cash larceny schemes were twice as common in small organizations as in larger organizations. The banking and financial services, government and public administration, and manufacturing industries were the most represented sectors in the fraud cases that were reported. Although mining and wholesale trade had the fewest cases of any industry in our study, those industries reported the greatest median losses.
Losses/Costs from Fraud Activities
The participants estimated that the typical organization loses 5% of revenues in a given year as a result of fraud. The overall loss for the cases in the study was $6.3 billion. The median loss was $150,000, with 23.2% of cases causing losses of $1 million or more. Therefore, as in the past, the large fraud cases were very large in size but most cases were smaller.
Most common types of fraud:
- Asset misappropriation was by far the most common form of occupational fraud, occurring in more than 83% of cases, but causing the smallest median loss of $125,000. Financial statement fraud was on the other end of the spectrum, occurring in less than 10% of cases but causing a median loss of $975,000. Among the various forms of asset misappropriation, billing schemes and check tampering schemes posed the greatest risk based on their relative frequency and median loss.
- Corruption cases fell in the middle, with 35.4% of cases and a median loss of $200,000.
As seen so often in our own experiences in the Timber Industry, the longer a fraud lasts, the greater the financial damage it caused. While the median duration of the frauds in the study was 18 months, the losses rose as the duration increased. At the extreme end, schemes that lasted more than five years caused a median loss of $850,000.
As in the past and in our own experience, the most common detection method in the study was tips (39.1% of cases). And organizations that had reporting hotlines were much more likely to detect fraud through tips than organizations without hotlines (47.3% compared to 28.2%, respectively). In cases detected by tip at organizations with formal fraud reporting mechanisms, telephone hotlines were the most commonly used method (39.5%). However, tips submitted via email (34.1%) and web-based or online forms (23.5%) combined to make reporting more common through the Internet than by telephone. Whistleblowers were most likely to report fraud to their direct supervisors (20.6% of cases) or company executives (18%).
When fraud was uncovered through active detection methods, such as surveillance and monitoring or account reconciliation, the median loss and median duration of the schemes were lower than when the schemes were detected through passive methods, such as notification by police or by accidental discovery.
As in previous studies, external audits of the financial statements were the most commonly implemented anti-fraud control; nearly 82% of the organizations in this study underwent independent audits. Similarly, 81.1% of organizations had a code of conduct in place at the time the fraud occurred. Small organizations had a significantly lower implementation rate of anti-fraud controls than large organizations.
This gap in fraud prevention and detection coverage leaves small organizations extremely susceptible to frauds that can cause significant damage to their limited resources. While the implementation rates of anti-fraud controls varied by geographical region, several controls-external audits of the financial statements, code of conduct, and management certification of the financial statements-were consistently among the most commonly implemented across organizations in all locations.
The presence of anti-fraud controls was correlated with both lower fraud losses and quicker detection. The study compared organizations that had specific anti-fraud controls in place against organizations lacking those controls and found that where controls were present, fraud losses were 14.3%-54% lower and frauds were detected 33.3%-50% more quickly.
As in the past studies, red flags give hints of possible fraud. For instance, fraud perpetrators tended to display behavioral warning signs when they were engaged in their crimes. The most common red flags were living beyond means, financial difficulties, and unusually close association with a vendor or customer, excessive control issues, a general “wheeler-dealer” attitude involving unscrupulous behavior, and recent divorce or family problems. At least one of these red flags was exhibited during the fraud in 78.9% of cases.
Primary Weaknesses in Organization Fraud Prevention Programs
The most prominent organizational weakness that contributed to the frauds in this study was a lack of internal controls, which was cited in 29.3% of cases, followed by an override of existing internal controls, which contributed to just over 20% of cases.
The perpetrator’s level of authority was strongly correlated with the size of the fraud. The median loss in a scheme committed by an owner/executive was $703,000. This was more than four times higher than the median loss caused by managers ($173,000) and nearly 11 times higher than the loss caused by employees ($65,000).
More occupational frauds originated in the accounting department (16.6%) than in any other business unit. Of the frauds that were analyzed, more than three-fourths were committed by individuals working in seven key departments: accounting, operations, sales, executive/upper management, customer service, purchasing, and finance.
The more individuals involved in an occupational fraud scheme, the higher losses tended to be. The median loss caused by a single perpetrator was $85,000. When two people conspired, the median loss was $150,000; three conspirators caused $220,000 in losses; four caused $294,000; and for schemes with five or more perpetrators, the median loss was $633,000.
The Fraud Perpetrators Themselves
Most occupational fraudsters are first-time offenders. Only 5.2% of perpetrators in this study had previously been convicted of a fraud-related offense, and only 8.3% had previously been fired by an employer for fraud-related conduct.
Decisions to Prosecute
In 40.7% of cases, the victim organizations decided not to refer their fraud cases to law enforcement, with fear of bad publicity being the most-cited reason. Of the cases in our study, 23.1% resulted in a civil suit, and 80.8% of such completed suits led to either a judgment for the victim or a settlement. In this study, 8.4% of the victim organizations were fined as a result of the fraud. The proportion of victim organizations fined was highest in the Western Europe (15.6%), Southern Asia (13.6%), and Asia-Pacific (11.7%) regions.
The correlation between the results of this study and my own personal experiences is in sync. Although the numbers could change if we were to do a study of the timber industry specifically and narrowed the search to US companies, I suspect the results would be similar.
Organizations face numerous risks to their success — economic risk, disaster risk, supply-chain risk, regulatory risk, and technology risk all affect organizations in different ways and to varying degrees. While fraud risk is just one of the many entries on this list of items that keeps executives awake at night, it is universally faced by all business and government entities. Any organization with assets is in danger of those resources being targeted by dishonest individuals. Unfortunately, a notable portion of that threat comes from the very people who have been hired to carry out the organization’s operations.
It is this risk-the risk of occupational fraud -that the first Report to the Nation on Occupational Fraud and Abuse was published in 1996 to explore and the mission to which we are dedicated to erase.