You discover your erstwhile trusted employee has been skimming funds to support a gambling habit. What do you do?

Your first response is possibly unprintable, and understandably so. Your cooler head will prevail, and look at a small series of options for recovery, and maybe a dollop of justice. If there are losses, especially substantial losses, you will look at the circumstances of the fraudster carefully and evaluate the alleged crime for prosecution. You will look into the possibility of recovery and what the sources of recovery might be. The disruptive impact of being the victim of a crime might very well turn your thoughts away from revenge to the more practical goal of remediation.

The case studies analyzed in the 2018 Report to the Nations on Occupational Fraud and Abuse suggest a range of options organizations choose in the wake of a fraud. The Report, a study published every other year by the Association of Certified Fraud Examiners (ACFE), includes actions both through internal mechanisms and through external legal channels.

How are fraudsters punished?

It will come as no surprise that 65% of the fraudsters were simply terminated. 12% of organizations agreed to a settlement with the perpetrator and 11% of organizations say the perpetrator was no longer with the organization.  What you might not expect is that 6% of organizations took no action and another 8% put the perpetrator on probation or suspension. The methodology of the study asks participant organizations about their biggest fraud case in the recent past, so a no action result suggests there are some very complicated circumstances below the surface. At the least, these widely disparate outcomes imply that organizations conduct an investigation of the fraud, and the evidence might point to a prudent course of action other than termination.

The perpetrator’s position in the company impacts their punishment.

The perpetrator’s role in the organization clearly modifies the organization’s response. An owner or executive is much less likely to be terminated (44% compared with 65% overall), and also much more likely to receive no punishment (12% compared with 6% overall). 72% of ordinary employees who committed a fraud were terminated.

Law enforcement is not always involved.

In the legal realm, uncertainty is increased by the fact that the alleged fraudster is innocent until proven guilty. The outcome of a civil action or criminal prosecution is not a given. Still, in 2018, 58% of frauds were referred to law enforcement and 23% resulted in a civil suit—the majority of these legal actions were resolved favorably to the victim.

Legal uncertainty abounds.

Yet the legal uncertainty is reflected in the fact that 12% of fraud cases are settled by agreement even before any legal action is taken (18% of owner/executive cases). In the group of civil cases, 27% are settled by agreement.  And, fully 15% of civil cases result in a judgment for the alleged perpetrator.

The risks deter some organizations from taking legal action. 38% of these organizations cited bad publicity as the main reason, and other risks might also impose costs. Compounding the reasons to avoid legal action is the fact that in 53% of cases the victim recovered nothing, zero dollars. The more victims lose, the smaller the proportion they recover.

It is clear that organizations look at the cost-benefit value in deciding on what course of action to take in response to a fraud. Revenge may feel good, but it doesn’t serve the organizations’ interests.

Fraud costs organizations worldwide an estimated 5 percent of their annual revenues, according to a study conducted by the Association of Certified Fraud Examiners (ACFE). The ACFE’s 2018 Report to the Nations on Occupational Fraud and Abuse analyzed 2,690 occupational fraud cases that caused a total loss of more than $7.1 billion.

The seriousness of the global fraud problem is why Lowers Risk Group announced that it will again be participating in International Fraud Awareness Week, Nov. 11-17, 2018, as an official supporter to promote anti-fraud awareness and education. The movement, known commonly as Fraud Week, champions the need to proactively fight fraud and help safeguard business and investments from the growing fraud problem.

Lowers Risk Group joins hundreds of organizations who have partnered with the ACFE, the world’s largest anti-fraud organization and premier provider of anti-fraud training and education, for the yearly Fraud Week campaign.

During Fraud Week, Lowers Risk Group will post a series of educational articles on its risk management blog at and will share fraud prevention tips and facts on its LinkedIn page.

Mark Lowers, President and CEO of Lowers Risk Group, remarks, “The ACFE has done an incredible job bringing awareness to the issue of fraud detection and prevention, and we are proud to be a supporter of this important effort.”

ACFE CEO and President Bruce Dorris, J.D., CFE, CPA, said that the support of organizations around the world helps make Fraud Week an effective tool in raising anti-fraud awareness.

“The latest statistics tell us that fraud isn’t going away, and companies that don’t have protective measures in place stand to lose the most,” Dorris said. “That’s why it is reassuring to me to see so many businesses, agencies, universities and other organizations involved in the Fraud Week movement. The first step in combating fraud is raising awareness worldwide that it is a serious problem that requires a proactive approach toward preventing it.”

“Since our first Fraud Week almost 20 years ago, the movement continues to grow,” Dorris said. “I heartily thank all of the supporters of Fraud Week for making it what it is today.”

For more information about increasing awareness and reducing the risk of fraud during International Fraud Awareness Week, visit FraudWeek.com.

The 2018 Report to the Nations is available for download online at the ACFE’s website: ACFE.com/RTTN.  The Report is in PDF format.

About the Lowers Risk Group

Lowers Risk Group provides comprehensive enterprise risk management solutions to organizations operating in high-risk, highly-regulated environments and organizations that value risk mitigation. Our human capital and specialized industry enterprise risk management solutions protect people, brands, and profits from avoidable loss and harm. For more information, visit lowersriskgroup.com.

About the Association of Certified Fraud Examiners
Based in Austin, Texas, the ACFE is the world’s largest anti-fraud organization and premier provider of anti-fraud training and education. Together with nearly 85,000 members, the ACFE is reducing business fraud worldwide and inspiring public confidence in the integrity and objectivity within the profession. For more information, visit ACFE.com.

When it comes to occupational fraud, the total loss an organization suffers is correlated with the length of time from when the fraud begins to the time it is detected. This is true for all types and circumstances of fraud even though some types lead to greater total losses, e.g., petty larceny vs. financial statement fraud. The Association of Certified Fraud Examiners’ (ACFE) 2018 Report to the Nations finds that frauds that are not detected in 60 months are 20 times as costly as those detected within the first six months.

Therefore, there is substantial value for any policy or procedure that reduces detection time. Overall the most common form of detection is from tips, especially when a safe and easily accessed hotline is provided. Other common forms of active detection are internal controls and routine internal and external audits.

Surprise Audits are Surprisingly Effective

Where external audits reduce fraud losses by less than a third, unannounced audits were found to reduce median loss and duration by 51%. When unannounced audits were in effect, median losses dropped from $152k per fraud case to $75k. What’s more, the use of unannounced audits was shown to cut the average detection time in half for fraud cases in the ACFE 2018 study. However, while superior in terms of effectiveness, unannounced audits are much less commonly used than external audits. Only 37% of the companies surveyed in the 2018 ACFE report, ‘Report to the Nations,’ used unannounced audits to detect fraud.

An unannounced audit would typically be performed by an external third party, but it doesn’t have to be. The key thing is that it must truly be unanticipated by employees or contractors who have access to assets to prevent them from taking steps to conceal fraudulent activity. An unannounced audit might employ a different and unusual approach compared to routine internal audits as an added precaution to thwart the fraudsters’ defensive tactics. Intuitively, an unannounced audit can disrupt fraud more effectively than an audit that is expected.

Perhaps the most important benefit of an unannounced audit is its capacity to detect frauds earlier, thereby reducing total losses. Obviously, these audits have to be performed often enough to disrupt fraudulent activity, but their value justifies the expense of more frequent application.

A secondary, less often recognized benefit of an audit being unannounced is that it provides a test of the routine controls in place to detect fraud. It is exactly where internal controls are weak that some of the most expensive frauds can occur.  The longer-term benefit of being unannounced includes strengthening the routine controls that operate every day.

Unannounced audits can be used in many circumstances. Auditing cash on hand is one of the most important applications, which can cover activities ranging from skimming petty cash to concealing large cash thefts from CIT carriers. Numerous accounting functions like accounts payable and payroll, as well as routines like inventory are vulnerable to frauds that can be detected by unannounced audits.

Like any other audit, unannounced audits have to be planned. The planning will involve identifying the risk points in the system being evaluated and understanding the design of existing internal controls. These factors will be used to create an audit approach leading to reporting and policy revisions as needed.

Sometimes an unannounced audit is the best way to reveal the truth about operations. The clear light of observation is the last thing a fraudster wants to see.

According to a 2018 report from the Association of Certified Fraud Examiners (ACFE), organizations lose 5% of their annual revenues to fraud. While you know your organization is not immune to fraud, it can be easy to assume that sooner or later, the fraudsters inside your organization will be caught. Surely, the controls you have in place and the managers and employees you trust are keen enough to detect and report unusual behaviors. So, why not let the truth reveal itself?

Should you do more to detect fraud?

While it’s true that most fraud (40%) is caught by tips from employees, customers, or vendors associated with the victim organization, relying on those tips is neither the most proactive nor the most effective way to detect fraud. In other words, just because tips are common, doesn’t mean they are the best source of detection.

Proactive fraud detection measures are shown to minimize the losses and damages caused by occupational fraud. The stark difference between proactive and passive detection methods comes to light when median losses and median months to detection are compared. Let’s take a strictly passive fraud detection method: confession. In cases where confession is the primary source of detection, it usually takes 24 months and costs the organization $186,000 in losses before the fraud comes to light. Comparatively, proactive measures such as account reconciliation, impact the organization far less and are detected more quickly. On average, account reconciliation is able to detect fraud within 11 months of its onset and halves the cost of fraud induced on an organization in comparison to relying on tips.

The outliers here are detection methods that are neither strictly active nor passive. These include tips and external audits, and how they are categorized depends on the circumstance. According to the 2018 ACFE report, such solutions were less effective than truly active solutions, but more effective than explicitly passive. For example, where fraud is detected through a tip, the case has generally already gone on for an average of 18 months with a median loss of $126K.

Being proactive is key to minimizing the losses and damages caused by occupational fraud.

The 2018 ACFE Report cites six proactive detection methods:

• IT Controls
• Surveillance/Monitoring
• Account Reconciliation
• Internal Audit
• Management Review
• Document Examination

The correlation between active and passive detection methods is made very clear. When plotting median months to detection and total losses, all six proactive detection methods outcompeted the passive detection methods in terms of both the time it took to detect, and the total amount lost in the case.

The point is clear, by choosing to proactively go after fraud, you put yourself in better standing to catch offenses early. This could be achieved by putting in place one of the six active detection methods. These proactive measures can be combined with other detection tools, such as hotlines. Hotlines and other reporting mechanisms were associated with a 50% reduction in losses for companies who have them, compared to companies without.

Does your organization take proactive measures to reduce the risk of occupational fraud? Discover ways to protect your company from the inside out.

Occupational fraud, referring to fraud caused by an organization’s own employees or executives, is among the most preventable fraud risks that a company faces. While preventable, this form of fraud is also one of the most prevalent in organizations.

To take a closer look at this phenomenon, the Association of Certified Fraud Examiners (ACFE) performs a bi-annual report. Its latest report, the 2018 Report to the Nations, studied 2,690 cases of occupational fraud across 125 nations. In addition to exploring its impact, the report looks at various fraud detection measures and their effect on the duration of the fraud and the size of loss incurred.

The ACFE report offers the latest stats on occupational fraud to inform your risk management and fraud prevention plans. Here are 8 notable findings:

1. Occupational fraud resulted in $7B in total losses in 2017.

The ACFE report identifies three categories of fraud: asset misappropriation, corruption, and financial statement fraud. Asset misappropriation was the most common type of fraud and occurred 89% of the time. However, financial statement fraud led to much greater median losses – $800,000 versus $114K median loss in asset misappropriation.

Of all asset misappropriation cases, altering checks and payments led to the greatest median losses, but billing fraud and non-cash were nearly tied for the highest overall incidences in asset misappropriation schemes.

2. Fraud cases resulted in losses greater than $1M or more in 22% of cases.

The 2018 ACFE report indicates that most companies either lose a relatively small sum (less than $200K) or a significantly larger amount. The differences are extreme. In 55% of cases, losses were below $200K, yet nearly a quarter of businesses incurred more than $1M in losses. The total loss values in between these two extremes were relatively less common, ranging from 2% to 11% in prevalence for this cohort. Of the 2,690 fraud cases examined, the median loss was $130K.

3. 40% of fraud cases were detected by a “tip.”

Early detection is key when it comes to limiting the losses associated with occupational fraud.  According to the ACFE study, the vast majority of fraud detection (40%) comes from tips, which far surpasses the second highest detection source, internal audit (15%).

Tips can come from anyone, but generally they come from within the company. In ACFE’s report, 53% of tips were received internally whereas 32% were from an outside source. Hotlines go hand-in-hand with tips as an effective way to detect fraud. Of the companies analyzed, those with an accessible hotline detected fraud cases 46% of the time, compared to a 30% success rate for companies without hotlines.

4. 96% of occupational fraud perpetrators had no prior fraud conviction.

Detection activities should take place throughout an employee’s tenure. Only 4% of fraudsters in the ACFE’s study had a history of criminal fraud. This is important information, as a pre-hire background check is likely insufficient on its own in preventing fraud. These first-time offenders require active and effective detection efforts to continuously protect the organization.

The ACFE was able to identify the six most common behavioral tendencies shared among fraudsters:

1. Living outside of one’s financial means.
2. Financial hardship.
3. Unnecessary levels of closeness to certain clients.
4. Controlling tendencies and reluctance to delegate with others.
5. Issues at home (e.g. divorce).
6. “Wheeler-dealer” tendencies.

5. Data monitoring and analysis combined with surprise audits reduce fraud loss by more than 50%.

Surprise audits and data monitoring are a powerful combination according to ACFE’s 2018 findings. Together, these contributed to significant reductions in fraud loss. When in place, proactive data monitoring and surprise audits got fraud cases under control in approximately half the time. Compared to cases where these controls were not in place, it reduced fraud losses by more than half.

Despite their effectiveness, neither proactive data analysis nor surprise audits tops the list for commonly used fraud control measures, each were only used by 37% of the companies examined in the 2018 study.

6. Weak internal security was responsible for almost half of the fraud instances.

Internal security can be a valuable line of defense for companies. When companies were asked about what opened the doors to fraud, 30% cited insufficient fraud controls as the top enabler. While 19% said that their systems were too weak and therefore overly easy for fraudsters to override.

7. Fraudsters who had been employed for more than 5 years stole twice as much.

According to the ACFE, employee tenure correlates with median fraud losses. The study found that fraudsters who had been a company for more than five years stole twice as much than relatively newer employees: $200K median loss versus $100K. Employees at a company for less than a year posed notably the least risk to companies, incurring median losses of $40K.

8. Collusion between two perpetrators doubles the loss.

Collusion is common in occupational fraud: 49% of cases investigated in ACFE’s study involved more than one fraudster. This holds especially true when executives and owners are involved – occurring in 66% of cases instigated by higher ups.

The involvement of multiple perpetrators is also more costly. The median loss in cases with one perpetrator was $74K, whereas that number rose to $150K for two perpetrators, and up to $339K when three or more were involved.

When it comes to occupational fraud, prevention and detection requires ongoing, diligent efforts. Whether it’s through surprise audits or providing channels for informants to report suspicious behavior, the team at Lowers & Associates can help establish your fraud prevention plan. Talk to a risk management expert today.