Thanks to the Association of Certified Fraud Examiners (ACFE), we know quite a bit about organizational fraud and abuse by way of its annual Report to the Nations. The data behind these annual reports is based on actual cases researched by fraud examiners and includes a standard set of measures across cases.

One part of the data that may be interesting to you is the variation of fraud and abuse across types of industries. ACFE has produced an infographic based on the 2016 report titled How Much Does Fraud Cost Your Industry? that summarizes part of the data, and we provide some additional background here.

Banking and Financial Services Top the Charts

Banking and financial services accounts for almost 17% of the total cases reported, with government and public administration, manufacturing, health care, and education all experiencing more than 5% of the cases, with retail close behind at 4.8%.

On the other end of the spectrum, communications, mining, wholesale trade, arts and entertainment, utilities and real estate each accounted for less than 2% of cases. To some extent, these numbers reflect the size of the industry, and specifically which industries are most likely to engage fraud examiners. However, the types of opportunities for fraud and abuse (the report refers to these as schemes) also vary by industry and will correlate with actual criminal activity.

Opportunities or schemes are defined by the type of fraud committed. Many of these involve financial transactions within the organization, including billing, check tampering, expense reimbursements, financial statement fraud, payroll, and register disbursements. Others are direct thefts of valuable goods or cash, like skimming, cash theft, non-cash theft, and cash larceny. Among these schemes, billing fraud is the most frequently reported, reflecting the fact that this is an activity virtually every organization performs—it is truly an equal opportunity fraud.

Corruption Crosses Industry Lines

Somewhat surprising is that the most prevalent scheme of all is corruption—it is the single most common fraud for most industries. Corruption accounts near or slightly above 50% of the reported cases in mining, transportation, manufacturing, oil and gas, and technology, and is not less than 20% of cases in any industry except professional services. Since manufacturing is also a higher risk industry overall, its level of fraud by corruption is very high, with 93 cases in 2016. Other industries with a high number of corruption cases include banking and financial services (138) and government and public administration (88).

The median cost of fraud varies from a low of $62,000 in education to a high of $500,000 in mining. For the other industries with most reported cases, banking and financial services was $192,000, government $133,000, manufacturing $194,000, and health care was $120,000. The costs are significant in all industries, indicating that anti-fraud measures are well worthwhile across the board.

To get a closer look at fraud in your industry, take a look at the 2016 Report to the Nations on Occupational Fraud and Abuse.

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.

A High Reliability Organization (HRO) is one that achieves desired outcomes consistently, despite operating in a highly complex environment characterized by high risks. It learns from its failures, even those unanticipated, and uses them to improve over time.

Could the Cash Processing and Transport System (CPTS) operate like an HRO? Let’s begin by determining if CPTS shares the characteristics of an HRO. … Continue reading