Focus on Fraud Prevention: Part 1
Businesses and organizations worldwide lose an estimated five percent of their revenue to occupational fraud each year, for an estimated total of $5 trillion lost globally on an annual basis, according to the recently published Occupational Fraud 2024: A Report to the Nations. The Report is a comprehensive global study by The Association of Certified Fraud Examiners (ACFE) that addresses the real cost of fraudulent schemes for businesses.
An important part of dealing with fraud in any business is learning how fraud is committed and detected. The Report reviews the typical perpetrators of occupational fraud, including how occupational fraud is committed and by whom, as well as how businesses can work to detect, identify, and prevent occupational fraud. To create the Report, the ACFE reviewed 1,921 cases from 138 countries and territories, with a total loss of $3.1 billion. Of the cases reviewed, the average loss per case was $1,662,000.00, and 22% of cases had losses that exceeded $1 million.
The Report provides key information for businesses to consider in reviewing their anti-fraud procedures and programs, as well as considerations for fraud prevention practices and protocols.
How is Occupational Fraud Committed?
There are three key categories of occupational fraud in the cases reviewed in the Report:
- Asset Misappropriation: When members of an organization (for example, employees) steal or misuse business resources. Asset misappropriation schemes include (but are not limited to) conduct such as billing schemes (22% of cases, with a median loss of $100,000.00) and theft of non-cash assets (22% of cases). This is "by far" the largest category of occupational fraud, accounting for 89% of cases.
- Corruption: This category includes misconduct such as bribery, conflict of interest, and extortion. Corruption was present in 48% of cases reviewed for the Report.
- Financial Statement Fraud: This includes intentionally implemented material misstatements or omissions in an organization's financial statements. While this type of conduct is less common, it has the highest cost, with an estimated median loss of $766,000.00.
It's important to note that the fraudulent schemes are not always limited to one category, and there is often overlap with at least one other type of occupational fraud. For example, in the Report, the ACFE notes that only 1% of cases involved solely financial statement fraud, indicating that a perpetrator of financial statement fraud has likely engaged in other types of schemes as well.
Who are the Fraudsters?
Most perpetrators of occupational fraud are employees (37%) or managers (41%), with those with the longest tenure creating the greatest losses, and schemes involving multiple perpetrators causing increasingly more loss. However, despite there being less perpetrators at higher levels, fraudulent schemes by owners and executives come with the highest cost for businesses.
Almost half of all of the cases reviewed for the Report were schemes committed by employees who had a tenure at the organization between one and five years. The departments with the greatest risk of occupational fraud schemes include operations, accounting, sales, customer service, executive/upper management, purchasing, administrative support, and finance.
How Important is Early Fraud Detection?
The ACFE found that a typical fraud case continues for a year prior to being detected, despite the fact that 89% of those committing fraud displayed at least one typical red flag in their conduct, with multiple red flags present in over half of all cases.
The longer a perpetrator is able to continue to commit fraud for, the higher the cost to the organization. For example, the Report notes that billing, cheque, and payment tampering, expense reimbursement schemes, financial statement fraud, payroll, and skimming schemes typically lasted for 18 months before being detected.
The Report includes key considerations for businesses in implementing fraud detection practices, with a focus on the importance of whistleblower programs and other fraud reporting mechanisms, Reporting programs resulted in fraud detection in almost half of the cases reviewed.
How does Fraud Prevention Make a Difference?
More than half of the occupational fraud cases reviewed occurred due to a lack of internal controls or an insufficiency (override) of the existing internal controls. The importance of fraud prevention cannot be overstated, particularly as 57% of organizations were unable to recover any of the loss; only 13% of the cases reviewed included a full recovery.
Most perpetrators take steps to conceal their misconduct and any evidence of wrongdoing. Only 11% of cases reviewed by the ACFE for the Report did not include concealment. Organizations without a fraud awareness training program lost nearly twice as much, as compared to those organizations with a training and awareness program.
The ACFE found that small businesses (with less than 100 employees) were less likely to have fraud prevention practices in place, leaving them far more vulnerable than their larger counterparts.
Conclusion
Fraud is a regrettable reality for almost all businesses, whether it is discovered or remains undetected. Fraud prevention and detection is imperative for businesses of all sizes, from startups to established organizations, and businesses should regularly review their anti-fraud practices and protocols to ensure that they continue to remain efficient and effective.
Originally published 30 April 2024
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