According to the Association of Certified Fraud Examiners (ACFE), a single case of occupational fraud costs the victim organization an average of more than $1.5 million, and Certified Fraud Examiners (CFEs) estimate that organizations lose 5% of their revenues each year to fraud. In the ACFE’s 2020 Report to the Nations, a study of 2,504 cases of occupational fraud investigated by CFEs in 125 countries, the typical fraud lasted 14 months before it was detected and caused a median loss of $8,300 a month.

In an effort to educate organizations on the reality of fraud and to increase awareness of the controls that can help reduce fraud, each year the ACFE sponsors Fraud Awareness Week. Today marks day one of our Fraud Week series, Fraud Stories and Lessons Learned, and we are pleased to introduce Milton de Oca, Director of Operations for Lowers & Associates International. Prior to joining L&A, Milton served 32 years as a police officer with the Miami police department, a gangs sergeant, and finally, as the commander of the intelligence and terrorism unit.

Milton tells the story of an attempted fraud he and the L&A team helped to uncover and resolve in South America related to the procurement of ballistic vests that were to be used for dignitary protection.

Listen to the story here:

This interesting case demonstrates that fraud can come in many forms and at any level. Often it takes a considerable amount of investigation to uncover the fraud and while, in this case, we were able to exonerate the client of the loss, the ACFE reports that most organizations (54%) do not ever recover the losses they suffer at the hand of occupational fraud.

Milton advises all organizations to enlist the help of an independent outside source in cases like these in order to conduct an unbiased investigation.

Stay tuned tomorrow for another fraud story from the front lines of Lowers & Associates.

Where Are the Whistleblowers and Auditors?

Today, we continue our special 5-part Fraud Week Coffee Break Series where we invite you to spend time each day learning about various aspects of fraud detection and prevention through the eyes of our Certified Fraud Examiners and other fraud experts.

Fraud Week is an annual movement, organized by the Association for Certified Fraud Examiners (ACFE), to champion the need to proactively fight fraud and help safeguard businesses and investments from the growing fraud problem.

In its 2020 Report to the Nations on Occupational Fraud, the ACFE looked at how fraud is detected. As it turns out, 43% of occupational fraud is detected by tips. The next most common way is 15% by internal audit. These statistics underscore the vital role of whistleblowers and the need for organizations to provide programs that enable employees and others to be able to safely report suspicious activity.

Fraud Detection

Whether by whistleblowers or other methods, fraud detection is a concept organizations need to understand in order to limit the losses they suffer at the hands of fraud. The faster organizations can detect fraud, the smaller the size of the loss. According to the ACFE, “It is also key to fraud prevention because organizations can take steps to improve how they detect fraud, which in turn increases the staff’s perception that fraud will be detected and might help deter future misconduct.”

As mentioned, by a large margin, tips from whistleblowers are the most common way occupational frauds are uncovered. This fact underscores the importance of cultivating and thoroughly evaluating tips that come in through your whistleblower program.

Here’s what the data reveals about fraud detection methods:

Source: ACFE 2020 Report to the Nations

How COVID-19 is Impacting Whistleblowers and Auditors

Preventing, detecting, and investigating fraud is more difficult during the COVID-19 pandemic. In fact, according to the ACFE’s COVID-19 Benchmarking Report, “An inability to travel is still the most significant challenge in combating fraud right now, but more people are citing conducting remote interviews as a current top challenge.”

In COVID, since a lot of people are still working remotely, a lot of employees can’t observe other employees’ habits and what they’re doing. And in general, investigating during COVID is very difficult because companies aren’t open and travel is more difficult.

Despite the challenges, organizations are wise to continue to support whistleblower programs and maintain their focus on fraud detection and investigations during the pandemic where the pressure, opportunity, and incentive for fraud is very high.

We hope you enjoyed this Coffee Break article. Come back tomorrow to hear from Carlos Rivera, CFE, MAFF, Senior Vice President – Caribbean & Latin America of Lowers Forensics International and Grant Mizel, Financial Analyst, Emerging Markets of Lowers Risk Group. Rivera and Mizel will speak about situational awareness and the Fraud Triangle during COVID-19.

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.

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.

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?