Benchmarking Fraud: How Does Your Organization Compare?

By Lowers & Associates,

benchmarking your controls

The Association of Certified Fraud Examiners 2018 Report to the Nations on Occupational Fraud and Abuse offers a treasure trove of data you can use to assess how your organization’s fraud profile stacks up against other organizations in terms of industry, size, and location.

The Report is based on case data reported from Certified Fraud Examiners (CFEs) from all over the world. It lends itself to benchmarking your organization because it allows you to compare your own experiences against the medians reported from broadly similar organizations. Perhaps most important, you can learn about how other organizations responded to fraud.

Your risk of fraud.

Industry sector makes a big difference in the incidence and cost of fraud. Private, for-profit companies have the highest incidence and the highest median loss, where not for profits have much smaller losses and fewer frauds overall. In between are publicly traded companies and government agencies. An interesting comparison is between private vs. public for-profit businesses, with the private ones suffering higher losses. In general, private businesses face less scrutiny than public ones.

One counter-intuitive finding is that defrauded small organizations (less than 100 employees) suffered losses almost twice as high as large organizations (100 or more employees) in absolute terms. It’s not likely that the difference is attributable to the amount of money available—larger organizations offer fatter targets.

Among all types of fraud risk, corruption is one of only two types of fraud that is significantly more likely in large organizations (the other being non-cash fraud), perhaps because size offers more opportunities for small organized cliques to penetrate weak points, or due to a larger network of connections. Corruption is prevalent in almost every industry type, with the lone exception of professional services.

Your fraud prevention measures.

The presence of anti-fraud controls, such as surprise audits, proactive data monitoring/analysis, codes of conduct, etc. is shown by the ACFE Report to reduce the medial losses associated with fraud. It is perhaps predictable that small organizations in the study were far less likely to have a full range of anti-fraud controls in place. They tend to have only the basics, such as internal audits, management review, and external reviews of financial statements. Right on cue, 42% of frauds in small organizations were caused by lack of internal controls, compared with only 25% for larger organizations which tend to have a far more complete and robust set of controls in place.

One important anti-fraud control is the presence of a tip line. This was present in a little over 20% of small organizations, but fully 80% of large ones. The reason the disparity is important is that tips are the most common way a fraud is detected.

Fraud is a threat to all types and sizes of organizations, but two tendencies in the data stand out.

  • First, large organizations deploy more controls, and ACFE finds that every type of control tends to depress fraud.
  • Second, large organizations are more likely to experience fraud by corruption, which is an intentional organized attack at the weak points in an organizations’ links between units, internal or external.

The good news is that controls do work. Small organizations that may not have enough control due to cost or scale need to find ways to implement variations of these controls. The potential payoff from fraud averted or detected quickly is too large to not implement the controls.

What can the lessons and benchmarks embedded in the ACFE’s Report to the Nations on Occupational Fraud and Abuse teach you about your own organization’s risks? How can you become better protected?

  Category: Occupational Fraud
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Lowers Risk Group Joins Movement to Shine a Spotlight on Fraud

By Lowers & Associates,

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.

 

 

  Category: Occupational Fraud
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Calculating the Payoff of Proactive Fraud Detection

By Lowers & Associates,

Calculate the Payoffs

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.

 

detecting fraud with tips

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.

how fraud is detected

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.

active fraud detection methodsThe 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.

  Category: Fraud Prevention
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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 Startling Facts About Human Capital Risk

By Lowers & Associates,

Human Capital Risks

People are often referred to as the greatest asset of an organization. While this may be true for your organization, the greater truth is, people also represent an organization’s greatest risks. The actions, inactions, and mere presence or influence of people, present a potential for loss across the spectrum of business activities.

Perhaps no source of risk is more perplexing, hurtful, and damaging than those caused by intentional harmful acts. Consider just a handful of startling facts:

1. 30% of business failures are due to employee theft.

Employee theft costs businesses an estimated $50 billion a year and is rising at a rate of 15 percent per year, according to the U.S. Department of Commerce. The Commerce Department and the American Management Association say that 30 percent of new business failures are due to employee theft and it is believed that 75% of employees steal from their employers at least once. (source)

2. Organizations lose 5% of revenue to ‘fraud from within.’

According to the Association of Certified Fraud Examiners (ACFE), occupational fraud is fraud committed against the organization by its own officers, directors, or employees–an attack against the organization from within, by the very people who were entrusted to protect its assets and resources. In its 2018 Report to the Nations, the ACFE projects that organizations lose 5% of their annual revenue to fraud. Of these cases of fraud, corruption represents one of the most significant fraud risks for organizations, with 70% of such cases perpetrated by someone in a position of authority (managers and owner/executives).

3. Workplace violence is the fastest-growing category of murder in the U.S.

According to OSHA, every year, 2 million American workers report having been victims of workplace violence. The Center for Applied Learning reports that workplace violence incidents have tripled in the last decade and is now the fastest-growing category of murder in the United States. And according to the Bureau of Labor Statistics (2016), fatal work injuries involving violence and other injuries by persons or animals increased by 163 cases to 866 in 2016; workplace homicides increased by 83 cases to 500 in 2016; and workplace suicides increased by 62 to 291. This is the highest homicide figure since 2010 and the most suicides since data collection began in 1992.

4. One in five American adults have experienced sexual harassment at work.

A CNBC survey found one-fifth of American adults have experienced sexual harassment at work. By age group, 16 percent of those ages 18 to 34 said they have been victims, while 25 percent of 50- to 64-year-olds say they have been. What’s more, according to a 2003 EEOC study, 75 percent of employees who spoke out against workplace mistreatment faced some form of retaliation.

5. 80% of active shooter incidents occur in the workplace.

The Center for Applied Learning reports active shooter incidents tripled in the last eight years, with an event occurring in the U.S. once every three weeks; furthermore, workers are now 18 times more likely to encounter workplace violence and an active shooter situation than a fire. According to FBI statistics, of 160 active shooter incidents in the United States between 2000 and 2013, over 80 percent (132) occurred at work.

Where there are people, there are risks. The actions taken by employees and even subcontractors representing your organization have a direct impact on the productivity, safety, and success of your organization. When those actions turn bad, either through negligence or intentional acts, the damage to people, brands, and profits can be significant. What are you doing to identify, prepare for, and mitigate your human capital risks?

  Category: Risk Management
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