Each year, the Association of Certified Fraud Examiners (“ACFE”) publishes the Report to the Nations, where it presents its findings related to occupational fraud and abuse. As defined in the report, occupational fraud is fraud committed by individuals against the organizations that employ them. In short, it is an attack from within.
The ACFE’s 2020 study on occupational fraud and abuse was the 11th study since 1996. The 2020 study encompassed 2,504 cases (investigated between January 2018 and September 2019) from 125 countries, representing over $3.6 billion in losses.
Back in April, we discussed some of the highlights from the study. This article will take a deeper dive into some of its findings.
Types of Fraud
The three major types of occupational fraud are asset misappropriation, corruption and financial statement fraud.
Asset misappropriation is the most common form of occupational fraud, in terms of frequency, representing 86% of cases in the ACFE’s study. However, the median loss related to asset misappropriation cases was only $100,000, which is significantly less than the other two types.
Corruption schemes fell in the middle, representing 38% of cases and a median loss of $250,000. However, corruption was identified as the most common scheme in every global region.
Financial statement fraud was seen in only 10% of the cases investigated; however, it was certainly the most expensive type of fraud with a reported median loss of $945,000.
Detection and Controls
Detection of fraud is a vital component of fraud prevention. The more proactive an organization is with identifying and addressing fraud, the more control employers have over their employees’ perception that fraud will be detected. This may help to deter wrongdoing going forward.
The ACFE’s study found that organizations with formal reporting mechanisms and fraud awareness training for their employees were more likely to receive tips from their employees. Of the 43% of fraud schemes that were uncovered via tip, half of those tips were reported by an employee. Further, the study found that organizations without whistleblower hotlines had median losses of $198,000, which was almost double the losses of organizations with hotlines.
Over the last decade, organizations have worked to increase the use of targeted anti-fraud controls. The use of hotlines and anti-fraud policies has increased by 13%. Anti-fraud controls reduce the magnitude of losses and increase the speed of detection. The ACFE estimates that a lack of internal controls contributed to almost one-third of the fraud cases studied.
Who Are the Fraudsters?
Common characteristics and risk profiles of those who commit occupational fraud were identified in the study. The perpetrator’s level of authority and the length of tenure were key factors in the size of the fraud. While executives accounted for only 20% of the frauds studied, their frauds had a median loss of $600,000. The correlation with authority and size of fraud has been proven time and time again by these annual studies. Additionally, the longer the perpetrator worked for the particular organization, the greater the damages. Fraudsters with a tenure of at least ten years stole a median of $200,000, four times larger than perpetrators with less than a year of tenure at their victim organization.
Our team has investigated numerous frauds or allegations of fraud involving asset misappropriation, corruption and financial statement fraud. Our experience is consistent with the results indicated in the study regarding controls, tips, hotlines and who commits fraud. Also, we often see an overlap in types of fraud – such as asset misappropriations and financial statement fraud – false financial statements prepared in an effort to cover the misappropriation.
Should you identify fraud, or have concerns of fraud occurring in your organization, contact Joel Rosenthal at 412.697.5387 or [email protected] or Alyssa Brunatti at 412.697.5371 or [email protected] to see how we can help you address those risks.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.