We were proud to join the Association of Certified Fraud Examiners’ (ACFE) 2019 Fraud Awareness Week as an official supporter. Saturday, November 23, 2019 will conclude a weeklong effort by the ACFE to minimize the impact of fraud by promoting anti-fraud awareness and education.

Companies lose an estimated 5% of their revenue annually as a result of occupational fraud, according to the 2018 ACFE Report to the Nations. It turns out, the risk of occupational fraud is much higher than many managers and leaders realize. Each case results in a median loss of $130,000 and with cases lasting a median of 16 months, fraud is something organizations of all sizes must take care to detect and deter.

In support of Fraud Week, we produced several informational articles, which are summarized here for easy reference:

How Technology is Helping in the Fight Against Fraud

The key to catching fraudulent actions before real damage is done is having systems in place to ferret out anomalies and report suspicious activities early. This means being equipped with tools like automatic monitoring, artificial intelligence, and anomaly detection protocols. For instance, surprise audits and data monitoring are a powerful combination in reducing fraud loss. Though only 37% of the companies examined in the ACFE  study used them, those that did got fraud cases under control in approximately half the time and reduced fraud losses by more than 50%.

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The ACFE’s 5 Big Fraud Tips You Should Act on Now

As part of the 2019 International Fraud Awareness Week, the Association of Certified Fraud Examiners (ACFE) distributes information and training to help anti-fraud professionals reduce the incidence of fraud and white-collar crime. A recent ACFE publication, 5 Fraud Tips Every Business Leader Should Act On, spells out five ways organizations can work to prevent and minimize fraud in the workplace. We’ve paired their recommendations with the research-based actions you can take to achieve these aims.

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Recovering Fraud Losses: What the Numbers Reveal

Losses from occupational fraud topped $7 billion in 2017, according to the Association of Certified Fraud Examiners’ (ACFE) most recent global study on occupational fraud and abuse, 2018 Report to the Nations. The median loss for all cases in the study was $130,000 USD, yet a full 22 percent of companies lost $1 million or more. To add insult to injury, only 15 percent of businesses that experienced fraud were able to fully recover their losses.

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7 Must-Haves for Occupational Fraud Prevention

These seven fraud prevention strategies, drawn from the 2018 Report to the Nations by the Association of Certified Fraud Examiners (ACFE), will go a long way in fortifying your organization against the conditions that can facilitate occupational fraud at the workplace.

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We hope you have taken some time this week to think about your 2020 fraud prevention programs and strategies and how you’ll build early fraud detection and proactive prevention into your processes.

No company is immune to fraud.

As part of the 2019 International Fraud Awareness Week, the Association of Certified Fraud Examiners (ACFE) distributes information and training to help anti-fraud professionals reduce the incidence of fraud and white-collar crime. A recent ACFE publication, 5 Fraud Tips Every Business Leader Should Act On, spells out five ways organizations can work to prevent and minimize fraud in the workplace. We’ve paired their recommendations with the research-based actions you can take to achieve these aims.

1. Be Proactive

A code of ethics for management and employees sets the tone that your organization is committed to conducting business honestly and fairly. Fortify your commitment with internal controls around areas of the business that are vulnerable to fraud.

In its 2018 Report to the Nations, the ACFE studied nearly 3,000 incidents of fraud across 125 nations. Here are the top 10 most common anti-fraud controls they found among the organizations in the study:

1. Code of conduct: 80%
2. External audit of financial statements: 80%
3. Internal audit department: 73%
4. Management certification of financial statements: 72%
5. External audit of internal controls over financial reporting: 67%
6. Management review: 66%
7. Hotline: 63%
8. Independent audit committee: 61%
9. Employee support programs: 54%
10. Anti-fraud policy: 54%

The study found that weaknesses in internal controls were responsible for nearly 50 percent of all fraud cases.

2. Establish Hiring Procedures

Background checks will continue to be one of the best practices any workplace can implement, yet surprisingly, a full 96 percent of fraud perpetrators had no prior fraud conviction, according to the AFCE’s 2018 report. Therefore, understanding the behavioral red flags displayed by fraud perpetrators can help organizations detect fraud and mitigate losses. The AFCE found that 85 percent of fraudsters displayed at least one of the six red flags listed below and 50 percent of them exhibited multiple red flags.

Six Red Flags of Fraud:

1. Living beyond means
2. Financial difficulties
3. An unusually close relationship with vendor/customer
4. Control issues, unwillingness to share duties
5. Divorce/family problems
6. “Wheeler-dealer” attitude

3. Train Employees in Fraud Prevention

Looking for signs of fraud isn’t top of mind for most employees, but having a code of ethics and internal controls create a strong workplace culture that’s attuned to the possibility of fraudulent activity. Employers can take this awareness a step further by educating employees on how to recognize fraud in their day-to-day lives.

Here are the top eight concealment strategies used by fraudsters:

1. Created fraudulent documents: 55%
2. Altered physical documents: 48%
3. Created fraudulent transactions in the accounting system: 42%
4. Altered transactions in the accounting system: 34%
5. Altered electronic documents or files: 31%
6. Destroyed physical documents: 30%
7. Created fraudulent electronic documents or files: 29%
8. Created fraudulent journal entries: 27%

4. Implement a Fraud Hotline

Now that employees know some of the signs to look for, employers should also provide a clear means for reporting suspected fraud. The top three ways that fraud is detected are through tips (40%), internal audits (15%), and management review (13%).

Employees are responsible for reporting 53 percent of occupational fraud cases with the remaining coming from outside parties, such as customers, vendors, or shareholders.

Having a fraud hotline has proved to be instrumental in detecting fraud. In fact, 46 percent of cases detected by tips in the AFCE’s study had hotlines versus 30 percent coming from tips where no hotline existed.

5. Increase the Perception of Detection

Keeping the risk of fraud both top of mind and at the forefront of your organizational policies and practices is key to preventing, recognizing, and mitigating its impacts. In addition to having employees sign a code of conduct, make sure you’re regularly communicating to staff about anti-fraud policies. Remind them of the methods available to report suspicions of misconduct and the potential consequences (including termination and prosecution) of fraudulent behavior.

Though 42 percent of the organizations in the 2018 Report to the Nation offered hotlines to report fraud tips, other mechanisms are also readily available. They include:

• Email: 26%
• Webform/online: 23%
• Mailed letter: 16%
• Other: 9%
• Fax: 1%

To learn more about helping your organization combat fraud, stay tuned here for the rest of our our 2019 Fraud Week Series. If you need help formulating your fraud prevention program, request a meeting with a risk management expert at Lowers & Associates.

This week is the 2019 International Fraud Awareness Week, an initiative of the Association of Certified Fraud Examiners (ACFE) to encourage business leaders and employees to prevent and minimize the impact of fraud in the workplace.

Occupational fraud, that is fraud committed by employees against employers, resulted in $7 billion in losses in 2017, according to the ACFE’s 2018 Report to the Nations. In studying nearly 3,000 incidents of fraud across 125 nations, they found cases ranging from computer theft to check tampering to corruption. Individual losses varied, with 55% of losses being $200,000 or less and 22% of cases being $1 million or more.

Through educational videos, workplace training, and awareness efforts, Fraud Awareness Week aims to arm workplaces with technologies and resources to prevent, identify, and effectively address these types of fraudulent activities.

A Snapshot of Occupational Fraud

Types of Fraud: Fraudulent activities fall into one of three categories: asset misappropriation; corruption; and financial statement fraud. Representing 89 percent of cases, asset misappropriation (e.g., altering checks or payments, misusing organizational resources) are the most common, with a median per-loss cost of $114,000, according to the report. Financial statement fraud, however, while more infrequent, led to much greater median losses at $800,000 per event.

Fraudster Profiles: Surprisingly, a full 96 percent of fraud perpetrators had no prior fraud conviction, according to the AFCE’s 2018 report. This underscores the fact that organizations need to have effective fraud detection methods in place to continuously protect the organization. This is particularly relevant considering fraudsters who were employed for more than five years stole twice as much, $200,000 vs $100,000 for newer employees.

Underlying Causes: Internal security measures are valuable lines of fraud defense for companies, yet nearly half of companies in the study cited “insufficient fraud controls” (30%) or “weak systems” (19%) as the underlying reason that fraud was made possible.

Impact: No organization is immune to occupational fraud. In fact, small businesses, defined as those with less than 100 employees, experienced a median loss of $200,000, compared to their larger counterparts of 100 or more employees, who experienced a median loss of just $114,000. It makes sense when you consider that small businesses have fewer resources to invest in internal controls and generally put more trust in their employees due to their inability to implement robust anti-fraud strategies.

Reporting Sources: Early detection is key to limiting losses associated with occupational fraud, and the ACFE study found that 40% of fraud detection came from tips. Of those tips, 53% were received internally and 32% from outside sources. Reporting hotlines go hand-in-hand with tips as an effective way to detect fraud. Of the companies analyzed in ACFE’s 2018 report, those with an accessible hotline detected fraud cases 46% of the time compared to a 30% success rate for companies without hotlines. The second highest fraud detection source at 15% was through an internal audit.

Using Technology to Detect Fraud

The key to catching fraudulent actions before real damage is done is having systems in place to ferret out anomalies and report suspicious activities early. This means being equipped with tools like automatic monitoring, artificial intelligence, and anomaly detection protocols. For instance, surprise audits and data monitoring are a powerful combination in reducing fraud loss. Though only 37% of the companies examined in the ACFE  study used them, those that did got fraud cases under control in approximately half the time and reduced fraud losses by more than 50%.

In its latest infographic, How is Technology Being Used to Detect Fraud, the ACFE highlights some of the technologies that organizations are using to proactively identify suspicious activities. Here is a sampling:

• 26% of organizations currently use biometrics as part of their anti-fraud programs, and another 16% expect to deploy biometrics over the next two years.
• Purchasing is the risk area where organizations most commonly use data analytics (41%) to monitor for potential fraud.
• Nearly two-thirds of organizations currently use exception reporting or anomaly detection techniques in their fraud-related initiatives.

View the ACFE Infographic at fraudweek.com

To learn more ways to help your organization combat fraud, continue to look for our Fraud Week content and visit the ACFE Resources page.

This Saturday, November 17, 2018, will conclude the Association of Certified Fraud Examiners’ 2018 International Fraud Awareness Week. Serving as a global effort to minimize the impact of fraud by promoting anti-fraud awareness and education, we were proud to join Fraud Week as an official supporter.

Your risk of organizational fraud is much higher than many managers and leaders realize, as demonstrated by the ACFE’s 2018 Report to the Nations on Occupational Fraud and Abuse. With a median loss of $130,000 per case, and with cases lasting a median of 16 months, fraud presents a risk to organizations large and small.

In support of Fraud Week, we produced several informational articles, which are summarized here for easy reference:

How Organizations Respond to Fraud

You discover your erstwhile trusted employee has been skimming funds to support a gambling habit. What do you do? The case studies analyzed in the ACFE’s 2018 Report to the Nations suggest a range of options organizations choose in the wake of a fraud. Typical responses include actions both through internal mechanisms, and through external legal channels.

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Benchmarking Fraud: How Does Your Organization Compare?

The ACFE’s 2018 Report to the Nations on Occupational Fraud and Abuse offers a treasure trove of data you can use to assess how your organization’s fraud profile stacks up against other organizations in terms of industry, size, and location. What can the lessons and benchmarks embedded in the report teach you about your own organization’s risks? How can you become better protected?

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Who’s Putting Your Organization at Risk of Fraud?

Many times, occupational fraud is committed by an employee or third-party partner who is experienced and trusted. Which of your employees—or leaders—is likely to flip over to the dark side? And why? The 2018 Report to the Nations on Occupational Fraud and Abuse provides valuable information on these questions. Based on data from almost 2,700 cases of occupational fraud submitted by Certified Fraud Examiners (CFEs) worldwide, the selected cases aggregate a huge amount of descriptive information that managers can use to detect fraud sooner.

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The Red Flags of Fraud You May Not Know

Much is written about the common behavioral red flags of fraud, but there are other red flags organizations should be aware of when it comes to predicting and preventing fraud. So-called human resources-related red flags and non-fraud-related misconduct can offer valuable insight to those responsible for anti-fraud programs.

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If there’s one takeaway from Fraud Awareness Week we hope you gleaned, it is the importance of early fraud detection and proactive prevention. Your organization is not immune to fraud, no organization is. The difference is how your organization deals with this reality in order to protect people, brands, and profits from unnecessary loss.

Many times, occupational fraud is committed by an employee or third-party partner who is experienced and trusted. Which of your employees—or leaders—is likely to flip over to the dark side? And why?

The 2018 Report to the Nations on Occupational Fraud and Abuse provides valuable information on these questions. This tenth edition of the Report, published by the Association of Certified Fraud Examiners (ACFE), is based on data from almost 2,700 cases of occupational fraud submitted by Certified Fraud Examiners (CFEs) worldwide. While not a random sample, the selected cases aggregate a huge amount of descriptive information that managers can use to evaluate their own organizations.

Here are a couple of key takeaways about the question of “Who?” in the fraud equation:

• Anyone and everyone is a potential fraudster, but organizations must be aware that those in long-tenured, high authority positions can present a greater risk. Fraud prevention programs have to recognize this fact and plan extensive monitoring and controls to mitigate the risk.
• Identifying a potential fraudster can be difficult. Background checks can help, but some previous fraudsters may not have bad information in the public record. The fraud triangle of “red flag” factors on issues of motivation and opportunity may help to identify risks.

Longer-tenured, higher-authority = greater risk.

One hard lesson from the Report—which is consistent over all 10 editions—is that owners and executives are a big risk in terms of fraud. They commit only one-fifth of the total frauds, but the median loss when they do go off the rails is $850,000, more than 5 times greater than managers ($150,000 median loss) and 17 times greater than regular employees ($50,000 median loss). One reason people with greater authority cause more damaging frauds is that they are able to evade detection longer: owner/executives hide for 24 months; ordinary employees only 12.

Owners and executives have the most access to the organization’s assets, and also have authority over some of the controls and processes established to deter fraud. They are also more likely to collude with others, and their frauds are more likely to be discovered by an external auditor or law enforcement. This argues for putting a risk management plan in place before fraud occurs, and to make sure the plan includes provisions for monitoring executive behavior as well as extensive controls on regular operations.

47% of occupational frauds reported were perpetrated by people with six or more years tenure with the organization. These long-term employees also stole far more money. In aggregate, the long-term employees caused much higher total losses than those who were with the organization less than six years. The length of tenure increases loss in all types of jobs, but the higher the authority the greater the loss. Both authority and tenure operate to increase the losses.

Follow the money.

By department, the data tends to say, ‘follow the money’. The two biggest threats come from upper management and accounting (with the high authority individuals by far the bigger threat). The single most common type of fraud is corruption, which strikes hardest in executive/upper management, and purchasing. Both of these departments are likely to be linked to both internal and external networks, which may foster systematic (often collusive) corruption.

Occupational fraud is estimated to have cost over $7 billion dollars in 2017. The warning to organizations is clear. There is no absolute certainty about the likelihood of any given employee committing a fraud. The organization’s best response is systematic fraud prevention aimed at all levels and functions of the organization.