8 Latest Stats on Occupational Fraud

By Lowers & Associates,

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.

  Category: Occupational Fraud
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5 Basic Fraud Steps Every Organization Should Take

By Lowers & Associates,

Almost every organization is vulnerable to occupational fraud and abuse, and the impact of fraud can be costly. The 2016 Report to the Nations by the Association of Certified Fraud Examiners (ACFE), indicates that the worldwide loss to fraud across all organizations is 5% of topline revenue. Based on reported cases of fraud, the median cost per case was $145,000, and some others were much more.

As part of the International Fraud Awareness Week for 2016, ACFE published 5 Fraud Tips, a one-page summary of steps an organization can take to reduce its vulnerability. Implementing these steps cannot guarantee your organization won’t suffer occupational fraud, but it will certainly improve the odds.

1. Be Proactive

Top management needs to put in place policies and procedures that set a tone from the top against fraud. This may include a code of ethics taught to every employee, with on-going follow up training that emphasizes the danger and unacceptability of fraud. Traditional financial controls should be in place and reviewed on a regular basis, possibly with an independent internal audit function. Fraud prevention will be enhanced through organizational structures like effective separation of duties.

2. Establish Hiring Procedures

The person you hire may be a future fraudster. The hiring process is an opportunity to look into the background of an applicant to look for factors that may indicate risk. Where it is legal, and following best practice guidelines strictly, employers can run a variety of background checks to get a fuller picture of an applicant’s character.

3. Train Employees in Fraud Prevention

Employee training can go beyond the code of ethics. Employees are on the frontline of fraud, working with others every day and working with the systems and controls that are potentially vulnerable to fraud. These employees need to be aware of the signs of fraud both in evidence (such as breeches of a control), and in the behavior of their colleagues. One of the most difficult factors of fraud to combat is the pressure employees may feel to look for ways to commit fraud.

4. Implement a Fraud Hotline

A straightforward way to improve fraud detection is a fair and anonymous hotline for reporting potential frauds. A tip has long been the most important source for fraud reporting, and the hotline can facilitate it.

5. Increase the Perception of Detection

Fraudsters’ number one concern is getting caught. An anti-fraud culture in which there is regular training, communication, and discussion about fraud makes it clear to the potential thief that he or she will be under surveillance. When fraud does occur, the organization has to act decisively to prosecute, sending the message that the crime will have consequences.

Taking these steps can reduce the risk of occupational fraud. In the long term, the improved channels of communication up and down the organization may also help establish a happier workplace, which is a further barrier to fraud.

 

  Category: Fraud Prevention
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[Slideshow] 18 Fraud Facts to Drive Your 2018 Fraud Prevention Plan

By Lowers & Associates,

Fraud Week comes at a perfect time each year, just before the start of a new year when many organizations take a structured look at their performance over the past months, and begin to prepare for the year ahead. When it comes time to review your fraud risk management and prevention plan, it pays to have some hard statistics in front of you.

Our latest slideshow features 18 facts straight from the ACFE’s bi-annual Report to the Nations on Occupational Fraud and Abuse. The report can help you understand and respond to the threat of organizational fraud in your company, and the facts presented can serve as benchmarks for your organization while helping to uncover areas you may have failed to address.

How will you use these facts to create a more effective fraud prevention plan for your company in 2018?

  Category: Fraud Awareness
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Why Fraudsters Do What They Do

By Lowers & Associates,

Most managers and owners eventually discover a case of fraud and abuse in their organization. The fraudster is often a trusted, long-time employee or manager who had or created access to some of the organization’s assets, and helped him or herself to it.

Why does this happen?

The answer is not simply greed, but most, maybe even all, people want things and want more things. There are studies that show an amazingly high proportion of employees or managers have taken small things from their organization. However, there is a line between this petty theft and intentional fraud that a few people cross over.

The Fraud Triangle: A Model for Understanding Fraud

The fraud triangle, created by criminologist Donald Cressey, lays out the three factors that make up a true case of fraud. Like all crime, fraud requires both motive (called “pressure” in most discussions of the fraud triangle) and opportunity. Cressey named two of the legs of his triangle after these, but added a third element—rationalization—that is needed to account for the fact that occupational frauds can go on for a very long time before being discovered. The rationalization allows the fraudster to dull the pain of remorse and carry on as if nothing were wrong.

It’s difficult to explain the incidence of fraud by opportunity. Of course, the crime cannot occur without opportunity, but the same circumstances are available to other people in the organization who do not yield to the temptation. Even the fraudster may be exposed to the opportunity for many years before stepping across the line.

The key to the fraud is pressure. There are as many sources of pressure as there are fraudsters, but the most typical one is financial. Fraudsters may suddenly need money they cannot get quickly enough by saving, perhaps for a debt or loss, or to compensate for a bad investment. Of course, greed plays a role when a desirable lifestyle cannot be supported by income. Some fraudsters may simply feel entitled by a real or perceived slight, by being passed over for a promotion, or other personal affront.

If the pressure is the motivation, then rationalization allows the fraudster to continue to live as a thief. The purpose of rationalization is to justify bad behavior, so it will frame the behavior as a righteous act. For instance, the fraud may be seen as a response of a mistreated small person against a cold, uncaring corporation. Whatever the specifics, think of the fraudster as believing that their gains are just deserts.

Most financial and organizational controls like segregation of duties are aimed at known opportunities. These are generally well known, documented, and taught. However, occupational fraud is almost always done by an insider who knows the controls very well. So, the motivational component is key, and neither internal controls nor external audits are designed to assess motivation.

How well do you know your employees?

16 Fraud Facts to Fuel Your 2016 Prevention Planning

By Lowers & Associates,

fraud week

As we look toward 2016, we thought it might be useful to get a quick big picture on organizational fraud for context. We have been posting about the causal factors driving fraud and urging you to develop an effective risk-based prevention program. Now, here’s the why: 16 facts about fraud drawn from the 2014 ACFE Report to the Nations that should make it relevant to you. … Continue reading