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.

Teamwork is usually a good thing. Many organizations work hard to increase its effectiveness because well-coordinated activity can boost productivity and improve outcomes. Unfortunately, the effect of multiple people colluding to commit occupational fraud and abuse has the same kind of effect as good teamwork by increasing the impact of the crime.

Greater Collusion = Greater Loss

The Association of Certified Fraud Examiners (ACFE) 2016 Report to the Nations on Occupational Fraud and Abuse shows that the greater the number of people colluding in a fraud, the greater the loss. The median loss for a lone fraudster was $85,000, while losses where 5 or more colluded was $833,000.

It’s important to note that about 48% of the cases covered by the 2016 report involve collusion between two or more people. However, fraud by collusion was detected in about 18 months as compared to 16 months for the lone fraudster, so the duration of the fraud was not the prime source of the higher cost of collusion. In any event, the frequency and higher cost of collusion means that this form of fraud is a serious threat.

Working Together to Defeat Controls

Collusion may enable fraudsters to defeat controls based on separation of duties, independent verification procedures, or other procedural methods intended to reduce fraud or failure. Certainly, employees are expert in the application of controls where they work every day. When two or more of them coordinate activity meant to defraud the organization, they can defeat the controls at least for a time.

How to Detect Collusion

Detection of clever collusion schemes may be improved by setting up automated tracking or standardized analytical systems that flag unusual behaviors. For example, numerous transactions on a dormant or very low volume account or transaction amounts outside normal limits may indicate fraud. The system might flag changes in employee behavior, such as failure to take a vacation for a lengthy period of time or a significant change in working hours. The system might be designed to create norms for behavior in a given type of job and compare each person in that role to the norm. Outliers’ of behaviors could be scrutinized more closely.

Prevention is the Best Medicine

Of course, prevention is better than detection because detection means that fraudulent losses have already occurred. Potential fraudsters may leave a trail based on internal searches, such as searches for accounts whose inactivity means that they would not be regularly monitored, helping them to escape detection.

More straightforward, a well-designed hiring process with effective background checks, plus regular training in fraud prevention can help to create a workplace culture where fraud is not tolerated. Multiplying the number of people who would report suspicious behavior is probably the most effective means of fraud prevention, including collusion to commit fraud.

International Fraud Awareness Week begins next week. The point of Fraud Week, sponsored by the Association of Certified Fraud Examiners (ACFE), is to raise the visibility of occupational fraud and abuse, and to remind organizations to review and improve their fraud prevention and detection capabilities.

In case you’re thinking fraud is not an issue in your organization, you should know that extrapolating from actual fraud cases examined in 2016 and reported to ACFE, organizations worldwide lose 5% of topline revenue to fraud. Virtually every type of organization from business, government to non-profit sectors is vulnerable to fraud.

How much do you know about occupational fraud and abuse with respect to your organization? Prepare for Fraud Week by trying your hand at these questions based on ACFE’s 2016 Report to the Nations on Occupational Fraud and Abuse (answers are below):

1. Occupational frauds are most often detected in which way:

a) By accident
b) Through a management review
c) By a tip
d) By an internal audit

2. The median duration of occupational fraud is:

a) 3 months
b) 6 months
c) 18 months
d) 24 months

3. About what percentage of occupational frauds are committed by 2 or more in collusion?

a) 19%
b) 37%
c) 48%
d) 62%

4. What is the median loss to fraud?

a) $110,000
b) $150,000
c) $225,000
d) $1,000,000

5. The proportion of the 2016 fraud cases in the U.S. committed by owners or executives is:

a) 5%
b) 10%
c) 15%
d) 20%

6. The median loss to fraud for companies with less than 100 employees as compared to companies with 10,000+ employees are:

a) Much smaller
b) Proportionately smaller
c) About the same
d) Larger

7. The largest proportion of fraud is perpetrated by employees who have been with the organization:

a) Less than 1 year
b) 1 to 5 years
c) 6 to 10 years
d) More than 10 years

Answers

1. c) By a tip. In 2016, tips were the most common detection method by a wide margin, accounting for 39.1% of cases. Hotlines were especially effective in generating tips.
2. c) 18 months. The longer the fraud continues undetected, the higher the cost. 20% of the cases in 2016 were undetected for 36 months or longer, and cases that endured for 60+ months caused a median loss of $850,000.
3. c) About 48%. In cases of fraud by collusion, the cost of the crime increased as more people were involved. A single fraudster caused a median $85,000 in losses, while a collaboration of 5 or more cost $833,000.
4. b) $150,000 was the median loss. However, the average loss per case was $2.7 million, indicating that losses due to occupational fraud can be very significant.
5. d) About 20%. Median loss due to fraud by U.S. owners or executives was far higher at $500,000 than for managers ($150,000) or employees ($54,000). Part of the difference is due to the fact that owner or executive fraud went undetected longer.
6. c) About the same. In 2016, the median loss of a fraud case in an organization of less than 100 employees was $150,000, the same as for an organization with 10,000 or more employees. The relative impact of the loss was obviously much greater for the smaller organizations.
7. b) 1 to 5 years. Employees are more likely to commit a fraud if they are familiar with the controls and systems in place, or when something in their circumstances changes over time. However, the median loss for a fraud increases regularly as the employee’s tenure lengthens.

You can learn a lot about occupational fraud and abuse by reading the 2016 Report to the Nations. Better yet, you can begin to see how you can improve your fraud prevention program to avoid being one of the cases in the Report.