Can You Get Away from the Reality of Fraud? Global Fraud Study of ACFE Proves No!
- Fikret Sebilcioğlu CFE, CPA, TRACE Anti-Bribery Specialist
- Managing Partner
- E-mail to Fikret
The Association of Certified Fraud Examiners (ACFE) published the results of its most recent global fraud survey in its highly anticipated 2016 Report to the Nations on Occupational Fraud and Abuse.
The study included 2,410 occupational fraud cases investigated by Certified Fraud Examiners (CFEs) all over the world between January 2014 and October 2015. 81.3 percent of the reported fraud instances occurred in the private companies while 18.7 percent occurred in government entities.
Analyzing actual case information provided by Certified Fraud Examiners, the report presented statistical data on the cost of occupational fraud, the perpetrators, the victims, and the various methods used to commit these crimes. The study shows once again that no companies immune to the fraud but risk definetly can be reduced.
Key findings from the 92-page report include the followings (all values in U.S. dollars):
Fraud is very costly: The CFEs who participated in the survey estimated that the typical organization loses 5% of revenues in a given year as a result of fraud. When applied to the 2014 estimated Gross World Product of $74.16 trillion, this translates to potential global fraud losses of up to $3.7 trillion.
Asset misappropriation is the most frequent and least costly, while financial statements fraud is the least frequent but most costly: Asset misappropriation was by far the most common form of occupational fraud, occurring in more than 83% of cases, but causing the smallest median loss of $125,000. Financial statement fraud was on the other end of the spectrum, occurring in less than 10% of cases but causing a median loss of $975,000. Corruption cases fell in the middle, with 35.4% of cases and a median loss of $200,000.
The longer a fraud lasted, the greater the financial damage it caused: While the median duration of the frauds in our study was 18 months, the losses rose as the duration increased. At the extreme end, those schemes that lasted more than five years caused a median loss of $850,000.
Using fraudulent physical documents are the most common way of concealment of fraud schemes: In 94.5% of the cases in the study, the perpetrator took some efforts to conceal the fraud. The top five concealment methods are (i) created fraudulent physical documents; (ii) altered physical documents; (iii) altered transactions in the accounting system; (iv) created fraudulent transactions in the accounting system; (v) destroyed physical documents. It is a rather interesting finding that the vast majority of fraudsters proactively attempted to conceal their schemes by creating, altering or destroying physical documents.
Tips are the most common detection method: The most common detection method in our study was tips (39.1% of cases), but organizations that had reporting hotlines were much more likely to detect fraud through tips than organizations without hotlines (47.3% compared to 28.2%, respectively). In cases detected by tip at organizations with formal fraud reporting mechanisms, telephone hotlines were the most commonly used method (39.5%). However, tips submitted via email (34.1%) and web-based or online form (23.5%) combined to make reporting more common through the Internet than by telephone.
Frauds hit small business worse: The losses suffered by small organizations were the same as that incurred by the largest organizations. However, this type of loss is likely to have a much greater impact on smaller organizations. In addition, small organizations had a significantly lower implementation rate of anti-fraud controls than large organizations. This gap in fraud prevention and detection coverage leaves small organizations extremely susceptible to frauds that can cause significant damage to their limited resources.
Organization sizes impact fraud schemes: Organizations of different sizes tend to have different fraud risks. Corruption was more prevalent in larger organizations, while check tampering, skimming, payroll, and cash larceny schemes were twice as common in small organizations as in larger organizations.
Fraud exposure is higher in certain industries: The banking and financial services, government and public administration, and manufacturing industries were the most represented sectors in the fraud cases examined. It is also noted that although mining and wholesale trade had the fewest cases of any industry in the study, those industries reported the greatest median losses of $500,000 and $450,000, respectively.
Most common anti-fraud controls: While the implementation rates of anti-fraud controls varied by geographical region, several controls—external audits of the financial statements, code of conduct, and management certification of the financial statements—were consistently among the most commonly implemented across organizations in all locations.
External audit is one of the least effective anti-fraud control although it is the most implemented one in victim organizations: Although the external audit is one of the least effective anti-fraud control (3.8% of cases), it is the most commonly implemented anti- fraud control; nearly 82% of the organizations in the study underwent independent audits.
More anti-fraud controls lead to lower fraud losses: The presence of anti-fraud controls was correlated with both lower fraud losses and quicker detection. Organizations that had specific anti-fraud controls in place were compared against organizations lacking those controls and it was found that where controls were present, fraud losses were 14.3%–54% lower and frauds were detected 33.3%–50% more quickly.
Schemes based on perpetrator’s department: More occupational frauds originated in the accounting department (16.6%) than in any other business unit. More than three-fourths of the frauds analyzed were committed by individuals working in seven key departments: accounting, operations, sales, executive/upper management, customer service, purchasing, and finance.
More individuals involved leads to higher losses: The median loss caused by a single perpetrator was $85,000. When two people conspired, the median loss was $150,000; three conspirators caused $220,000 in losses; four caused $294,000; and for schemes with five or more perpetrators, the median loss was $633,000.
Most common behavioral warning of fraud perpetrators: Fraud perpetrators tended to display behavioral warning signs when they were engaged in their crimes. The most common red flags were living beyond means, financial difficulties, unusually close association with a vendor or customer, excessive control issues, a general “wheeler-dealer” attitude involving unscrupulous behavior, and recent divorce or family problems. At least one of these red flags was exhibited during the fraud in 78.9% of cases.
The 2016 Report to the Nations is available for download at ACFE.com/RTTN.
Source: Report to the Nations on Occupational Fraud and Abuse – 2016 Global Fraud Study by ACFE.
Fikret Sebilcioğlu, CFE, CPA