Olympus scandal: $1.7 billion. Bernie Madoff’s Ponzi scheme: $65 billion. Enron’s estimated total losses: $74 billion. Occupational frauds committed by owners and executives tend to be extremely costly, but why are they more costly and how do they differ from other types of fraud?
In the ACFE’s 2018 Report to the Nations, survey respondents were asked to provide a broad range of information about the fraud perpetrators they investigated, including the offenders’ details of employment, basic demographics, prior misconduct and behavior that might have been warning signs of fraudulent activity. One highlighted area was fraud committed by those at the top of an organization or agency. Owners’ and executives’ level of authority, the duration of their frauds and their tenure all contributed to their frauds being more costly.
Level of authority
As seen in the report, there is a strong correlation between the fraud perpetrator’s level of authority and the size of the fraud. While owners and executives only committed 19% of the frauds in our study, the schemes committed by these individuals resulted in a median loss of $850,000, which was nearly six times larger than the median loss caused by managers, and 17 times larger than the median loss caused by low-level employees.
A significant correlation between authority and fraud loss has been found in every edition of the report dating back to 1996. This correlation likely reflects the fact that high-level fraudsters tend to have greater access to an organization’s assets than low-level personnel. They may also have greater technical ability to commit and conceal fraud, and they might be able to use their authority to override or conceal their crimes in ways that low-level employees cannot.
Another reason frauds committed by high-level perpetrators are more costly could be that their schemes tend to last longer. The median duration of a scheme committed by an owner/executive was 24 months, compared to 18 months for schemes committed by managers and 12 months for those committed by employees.
As the report shows, fraud losses tend to increase based on how long the fraud perpetrator worked for the victim organization. Perpetrators with less than one year of tenure caused a median loss of $40,000, while those with more than 10 years’ experience at the victim organization caused a median loss of $241,000, more than six times as high.
One possible explanation for the correlation between tenure and fraud loss might be that employees who have been with an organization for long periods of time are often promoted to positions of greater authority.
To test this explanation, we separated all fraud offenders into two groups: those who had been with their organizations five years or less, and those who had been with their organizations six years or more. We then compared the median loss for these two groups across similar levels of authority. Interestingly, at every level, the more tenured fraudsters caused significantly larger losses than their less tenured counterparts. This indicates that the correlation between tenure and fraud loss to some extent operates independently from the offender’s level of authority.
We believe it is likely that those with longer tenure at a victim organization tend to have a better understanding of the organization’s controls and processes — including gaps or weaknesses in those processes — which may enable them to do a better job of committing and concealing fraud. In a sense, these perpetrators are learning from experience how to steal from their employers.
These findings can help you to identify the common characteristics and risk profiles for those who commit occupational fraud, which can help you better recognize fraud perpetrators or those at risk for engaging in fraudulent activity. You can find the 2018 Report to the Nations, as well as supplementary infographics and resources, at ACFE.com/RTTN.