Fraud Can’t Happen Here! Really?
If you are like many business owners and managers, you are certain there are no fraud problems in your organization. Are you really sure?
Every two years, the Association of Certified Fraud Examiners (ACFE) publishes a new version of their “Report to the Nations” (here’s the 2014 version) on the incidence and costs of organizational fraud. In every report they find that about 5% of top line revenue is lost worldwide to thefts by employees, owners, or partners with access to an organization’s resources.
The aggregate monetary cost of these losses is staggering, and does not even estimate the on-going costs of damages to reputation. ALL types of organization are vulnerable, and ALL types of employees and owners perpetrate these thefts. The only distinctive pattern in the data year after year is that fraud is a ubiquitous problem.
And yet, we often find organizations that have no preventative measures in place against fraud, and take no effective actions to detect it. This complacency is a common human trait: if nothing has happened in the past, nothing is going to happen in the future. Predicting the future based on historic patterns is a powerful tool, and it is often accurate.
Fraud is not a “black swan” event.
It’s important to realize that fraud is not a “black swan” event, something so unusual and unpredictable that it totally disrupts and changes our worldview. Rather, the ACFE data shows a very systematic probability that an organization will experience fraud. Just because the probability is small (one out of 20, approximately) doesn’t mean it will never happen, and unlike the black swan, we do know about it, beforehand.
Here are some findings from the 2014 Report to the Nations to help clarify the picture:
- Extrapolating the 5% revenue loss to the Gross World Product, organizational fraud costs $3.7 trillion dollars each year.
- The median loss to fraud is $145,000, with over 20% of cases costing over $1 million.
- The higher the fraudster is in the organization, the higher the loss. And owners and CEOs do sometimes commit these crimes.
- Most fraudsters are first-time offenders, with no criminal background history that would trigger suspicion.
- In the ACFE cases surveyed, 58% of the organizations had not recovered any of their losses to date.
There is some good news. The ACFE finds that organizations with effective tip policies in place are better positioned to detect fraud. About 40% of the cases detected are found this way. Further, preventative measures like third party audits and careful designs of internal controls can help to reduce the incidence (probability) of fraud. Proactive organizations can get some control over fraud, though it is logically impossible to eradicate it.
This year we are proud to support the ACFE’s International Fraud Awareness Week to raise awareness of the reality of fraud and discuss measures you can take to lessen the chances and impact of fraud on your organization.