Occupational Fraud is a universal problem for businesses around the globe as it does not recognize borders and does not discriminate. Fraud typically goes unnoticed for a median time of 18 months. All businesses are aware that the longer the fraud lasts, the more financial damage it causes to the bottom line.
Fraud is not always easily discovered, as its nature is one of shadows, disguised schemes and underhanded criminal activity. The pervasive nature of fraud is such that it affects both small and large corporations, but, sadly, many corporations live in a pseudo state of false security thinking they are prepared when they are not.
According to the Association of Fraud Examiners’ (ACFE) 2014 Report to the Nations on Occupational Fraud and Abuse, fraudsters exhibit certain behavioral traits that can be warning signs of their crimes, and there are some key factors and statistical takeaways that can help businesses shed light onto the dark problem of fraud. To study this the report took into account a range of cases from privately owned and publicly traded organizations which accounted for approximately two-thirds of the victims in the reported cases. The report additionally analyzed, government entities and not-for-profits which made up 15.1% and 10.8%, respectively, of the total cases. The size of organizations ranged from less than 100 to over 10,000 employees and included banking and financial services, government and public administration, and manufacturing (the most represented sectors among the fraud cases analyzed) among others.
The Numbers you can’t Ignore
The old saying “Knowledge is Power” is fundamental to understanding fraud. An in-depth examination of the problem combined with up-to-date statistical data helps corporations and those within the fraud detection market fight potential threats. The question then becomes what are some of these key factors the ACFE identified that can add to our knowledge base? – See below:
The Loss: The median global loss caused by occupational fraud was $145,000 per case with 22% of the cases involving losses of at least $1 million dollars. Additionally, it was estimated that each year organizations lose 5% of their revenue to fraud, and when applied to the 2013 estimated Gross World Product, fraud accounted for potentially $3.7 trillion USD in losses globally.
Three of a Kind – where’s the fraud: There are three primary occupational classification categories of fraud: asset misappropriations, corruption and financial statement fraud. Of these, asset misappropriations were the most common, occurring in 85% of case studies but they appeared to be the least costly with a median loss of $130,000. Contrasting that figure, 9% of cases involved financial statement fraud with a median loss of $1 million; however, those cases also had the greatest financial impact.
Tips help but aren’t everything: Detection of fraud by tips was also the most common means of detection noted in the report – Over 40% of all cases were detected by a tip, and they accounted for more than twice the rate of any other detection method.
Additionally, half of the tips that led to the discovery of fraud came from employees. Organizations with hotlines were also shown to experience fraud at a less costly percentage of 41% and detected fraud 50% more quickly.
Industries at Risk: The greatest number of fraud cases reported came in the banking, financial services, government, public administration, and manufacturing industries. The largest reported median losses, however, came in the mining, real estate, and oil and gas industries.
Risk within the industry : Individuals working in one of seven departments: accounting, operations, sales, executive/upper management, customer service, purchasing and finance departments accounted for 77% of fraud within corporations.
Smaller organizations suffer: Smaller organizations suffer disproportionately large losses due to fraud compared to larger corporations. Risks faced by small businesses also differ from those of larger organizations, as certain categories of fraud are much more prominent in small entities than that of their larger counterparts.
Tech Reduces Risk: The report noted the presence of anti-fraud controls reduced fraud loss and led shorter fraud duration. Organizations who were potential targets of fraudulent behaviour, who had put in place any of several common anti-fraud controls, saw significantly less damage and detected fraud more quickly than organizations without such controls.
The higher the authority, the higher the fraud: The higher the authority of the perpetrator of fraud, the greater the loss tended to be. Nineteen percent of fraud cases involved owners/executives, and they accounted for a median loss of $500,000. Employees were not immune to committing fraud either with a 42% commitment rate of occupational fraud, and they accounted for a median loss of $75,000. Managers ranked in the middle, committing 36% of fraud with a median loss of $130,000.
Working together means more fraud: Employees who colluded with others were able to evade anti-fraud controls and independent checks, allowing them to steal larger amounts of money. Fraud committed by a single person showed a median of $80,000; however, as the number of fraudsters increased so did losses dramatically. Fraud cases committed by two people showed a median loss of $200,000, for three people it increased to $355,000, and with four or more people the median loss was greater than $500,000.
Fraud recovery is hard: Recovery of stolen funds from fraud takes time and effort, and due to size and other factors, many organizations may never fully recover. At the time of the survey, it was reported 58% of victim organizations had not yet recovered any of their losses, and a smaller number had yet to make a full recovery at 14%.
The Problem of Prevention
When looking at the data as a whole, it becomes clear that fraud is a multifaceted problem with many key factors. It is, for this reason, that corporations need to recognize that fraud is something that requires both monitoring and detection. While fraud itself is the issue at hand, it is worsened by the lack of preventative measure put in place.
Small and large corporations need to look at anti-fraud detection programs to protect their bottom lines just as they would look at a life insurance policy to protect their life. Insurance policies protect, but not when they are purchased in hindsight. Ironically, many corporations take the same approach to anti-fraud detection measures as some do to life insurance- something to put in place only when they have time and means. Fraud, however, waits for no one, and by the time it is discovered it is too late. Corporations big and small need to recognize fraud happens in real time, and that there is no better insurance than the assurance of being fully protected.
Fraud is pervasive, but it does not have to be a thief in the dark. Corporations big and small can combat fraud through vigilance and planning, and by so doing bring light to the problem of fraud. Fortunately, prevention and detection software such as that provided by Salviol removes the stress of needing to do your own due diligence. Our pioneering technology combined with our network of globally recognized partners allows us to deliver solutions to industry leaders in financial services, government institutions, and privately owned companies – saving them billions in annual revenue each year.
Don’t let fraud affect your bottom line.
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