“Often times the fraud perpetrators are the most trusted and long-serving employees, and small family-owned enterprises are just as susceptible, if not more so, than larger organizations. Therefore, fraud education and awareness can be key to preventing or detecting fraud early. Remember, the earlier fraud is detected, typically, the lower the loss to the organization.” – Katie Gilden, Chief Operating Officer, Fiske & Company
Preventing, detecting, and investigating occupational fraud requires a deep understanding of the types of schemes, potential financial losses, emerging threats and risk mitigation strategies. To that end, the Association of Certified Fraud Examiners (ACFE) has published its “Report to the Nations,” the preeminent source for occupational fraud statistics and trends, every two years since 1996.
The 2022 ACFE report covers 2,110 occupational fraud cases in 23 industries and in 133 countries. Surveyed organizations have lost more than $3.6 billion to fraud. The report can help your organization understand and mitigate fraud threats. Here are some of the highlights.
The ACFE divides occupational fraud schemes into three types:
This includes cash theft, fraudulent disbursements, larceny and misuse of inventory and is the most common type of occupational fraud, accounting for 86% of cases. The median loss for these schemes is $100,000.
Financial statement fraud
The least common type of fraud (9% of cases), financial statement schemes generate the highest losses — a median loss of $593,000 in the 2022 report.
This falls between asset misappropriation and financial statement fraud in terms of losses and frequency. In the 2022 report, corruption costs resulted in a median loss of $150,000. Fraud experts who participated in the study estimate that the average organization loses 5% of revenue to fraud each year. This percentage can serve as a starting point for determining your risk of suffering financial harm.
Detection and the role of tips
According to the ACFE report, a typical fraud case generates losses of $8,300 per month and lasts for 12 months. Forty-two percent of frauds in the report were uncovered via tips, with more than half of those provided by employees. Forty percent of tips came via email, 33% via a web-based form and 27% from phone calls. The volume of email and web-based tips exceeded the number of tips submitted via phone hotlines. However, organizations offering hotlines reduced the median loss of fraud by 50%, from $200,000 to $100,000. Those organizations detected fraud faster and reduced the duration of schemes by 33% — from 18 months to 12 months.
Almost half of the cases analyzed in the 2022 report were determined to occur because the organizations lacked adequate internal controls or managers had overridden existing controls. The report also highlighted a lack of management review and a poor “tone at the top” as primary control weaknesses contributing to fraud. Not surprisingly, the ACFE found that the existence of antifraud controls can lower fraud losses and accelerate fraud detection. To help organizations understand the impact of internal controls, the ACFE details the effect of 18 common policies on median loss and median duration of fraud schemes. These include hotlines, surprise audits, codes of conduct, antifraud training and proactive data monitoring. For example, when job rotation or mandatory vacation policies are in place, the median loss from fraud is $64,000. When neither control is in place, the median loss climbs to $140,000. Similarly, when organizations have job rotation or mandatory vacation policies in place, fraud schemes typically last eight months. This duration doubles to 16 months when those controls aren’t in place.
Learn from Others
The ACFE report is relevant to organizations of every size and in every industry. Learning about the losses of others can help your company better assess risk and take steps to mitigate fraud. If there’s one overwhelming takeaway from the ACFE reports, it’s that internal controls are essential. Contact us for help assessing your control needs.