Report to the Nations: The Top 5 Ways Fraud Affects Your Bottom Line

AUTHOR'S POST

Mandy Moody, CFE
ACFE Media Manager

The ACFE's 2016 Report to the Nations on Occupational Fraud and Abuse provides an analysis of 2,410 cases of occupational fraud that occurred in 114 countries throughout the world. What makes this analysis so valuable is its ability to give readers a true idea of the toll fraud can take on a company.

Here are the top five conclusions that describe the impact fraud can have on the bottom line:

1. 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.
2. 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.
3. Approximately two-thirds of the cases reported to us targeted privately held or publicly owned companies. These for-profit organizations suffered the largest median losses among the types of organizations analyzed, at $180,000 and $178,000, respectively.
4. Of the cases involving a government victim, those that occurred at the federal level reported the highest median loss ($194,000), compared to state or provincial ($100,000) and local entities ($80,000).
5. Although mining and wholesale trade had the fewest cases of any industry in our study, those industries reported the greatest median losses of $500,000 and $450,000, respectively.\

It is impossible to know exactly how much fraud goes undetected or unreported, and even calculations based solely on known fraud cases are likely to be underestimated, as many victims downplay or miscalculate the amount of damage. Nonetheless, attempts to determine the cost of fraud are important, because understanding the size of the problem helps bring attention to its impact, enables organizations to quantify their fraud risk, and helps management make educated decisions about investing in anti-fraud resources and programs. 

Find more takeaways and download the full report at ACFE.com/RTTN.

Character and Behavior: The Other Red Flags of Fraud

GUEST BLOGGER

Mary Breslin, CFE, CIA
President, Empower Audit

I sat in front of my boss, the general counsel for the organization I worked for, waiting for our meeting to begin. I was still searching for the right words to explain to him why I wanted to widen the scope of an audit in Zambia and conduct some specific fraud auditing techniques. I wasn’t sure whether or not I should admit that while my team had found some exceptions on day one of the audit, my real suspicions had arisen from the Zambia general manager’s personal behavior.

Two issues had been identified: First, a cash advance had been taken out by an employee on behalf of the general manager and given to an individual who was not an employee. After some careful questioning, it was revealed that the individual was the general manager’s mistress, who needed money to pay her rent while he was out of the country on a business trip. The advance had been repaid by the general manager immediately upon his return. As a part of that conversation, it was also revealed that he requested the cash advance because he didn’t want his wife to see a large cash withdrawal from his bank account. Okay, not a great guy, but nothing I hadn’t seen before. It was a clear policy violation for use of the funds, but it had been repaid.

The second issue came later that day during a payroll and benefits review. Apparently the general manager had added a new dependent that year to his benefits, and we assumed he and his wife had adopted a child while living in Africa. When I asked accounting, they introduced me to this “dependent” who happened to be in the office — his wife. And I mean his “other” wife. In many parts of Africa polygamy is still practiced, however this gentleman was from England and I knew he had a wife and two children — also his dependents — still in England. Add the mistress to this cozy arrangement and I was starting to get pretty concerned. Wouldn’t you?

After having dinner with the general manager and, I admit, a few beers later, he confessed his love for women, pretty much all women, and admitted there might be other wives. Wait, what?

I explained my concerns regarding the general manager’s character to my boss, and we dug a little deeper and crossed over into a true fraud audit. Based on what we found, that quickly turned into a fraud investigation.  

So what did we find? To start, we found four wives in four countries… and a couple of mistresses. We also found a company he owned with a wife in South Africa that was established strictly as a pass-through scheme for supplies. We found $18 million worth of tax payments that were misappropriated — not used to pay taxes. The tax authorities had actually been getting ready to take action against us. And there was more.  In addition to the obvious issues — all of the women — and the financial pressure those issues caused him, there were other red flags. The general manager was a micromanager and a control freak. He required his staff to bring him every file and document we requested for his review before they would give it to my team. I generally call that a “clue.” Luckily for the organization, this was a profitable location. By bringing in a skilled executive to control the money, the company was quickly able to get the location back on track. So what happened to the general manager? I’m not sure, maybe I could ask one of his wives. Actually, because he was such a profitable general manager, he was “counseled” and he kept his job. It happens.

Companies Big and Small Face Asset Misappropriation Risks

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Andi McNeal, CFE, CPA
ACFE Research Director

We all know that the specific risks faced by organizations vary as much as the nature of the organizations themselves. This is true for many fraud risks, as well. Financial reporting fraud is probably not a significant risk in a sole proprietorship that does not issue financial statements to external parties. Corruption risks are much less likely in small, service-based businesses, such as doctors’ offices, than in large, multinational manufacturing companies. But all entities that have employees — from mom-and-pop retail stores to government agencies to high-tech, global conglomerates — face the risk that those employees will misappropriate organizational resources. In fact, ACFE research shows that asset misappropriation schemes account for more than 85 percent of all occupational frauds, a finding that underscores the likelihood, significance and universal nature of this risk.

For years, we have included information on how to prevent, detect and investigate asset misappropriations as part of our various training offerings. But because all companies — of all sizes, in every industry and in every country — are at risk for asset misappropriation schemes, we decided the topic merited its own course that focuses specifically on this threat to organizations. Our new two-day seminar in Las Vegas, Controlling the Risk of Asset Misappropriation, dives deeper into how you can protect youself from these schemes than any of our other course offerings have previously done.

In this new course, you will walk through numerous business processes common in most companies, from selling goods and collecting customer payments to paying vendors and processing payroll, and learn how to identify and assess weaknesses that could leave those processes vulnerable to dishonest employees. You will also learn about specific internal controls to help protect all organizational assets — cash, inventory, equipment, trade secrets and proprietary information — from being misappropriated. And, through the use of several video case studies, you will explore real-life asset misappropriation cases, discuss the contributing factors, and determine techniques that would have been helpful in deterring, detecting and examining those schemes.

Although asset misappropriations don’t make front-page headlines as often as financial statement shenanigans or FCPA violations, the potential impact of these schemes should not be. Controlling the Risk of Asset Misappropriation is designed to help you identify and protect against common pitfalls that expose company assets to misappropriation — long before the wrong employee exploits such weaknesses.

A Fraud Report for Europe

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Scott Patterson
ACFE Media Relations Specialist

According to ACFE research, the median fraud loss for European organisations is €420,780 – significantly higher than any other world region. In our 2010 Global Fraud Study, European statistics have been presented and analyzed for the first-ever ACFE Report to the Nations on Occupational Fraud and Abuse, European Edition. We’ve published the Report online, as the ACFE European Fraud Conference in Brussels convened Tuesday. As the Wall Street Journal outlined on Tuesday, the European Edition of the Report to the Nations on Occupational Fraud and Abuse focuses exclusively on the 157 cases of occupational fraud from Europe that were included in the study.

A few of the other interesting findings for Europe include the following:

• The most common type of occupational fraud is asset misappropriation, which occurred in 78 percent of all cases. Fraudulent financial statements caused the highest median loss in our study (€16,410,420), though there was a small sample of only 10 cases.
• Occupational frauds were much more likely to be detected by a tip than by any other means. We found that 40 percent of all frauds were detected by a tip, while internal audit (17 percent of cases) and management review (16 percent of cases) ranked second and third, respectively.
• Small organisations were disproportionately affected by occupational fraud. The median loss for organisations with fewer than 100 employees was €613,638, while the median loss for organisations with more than 10,000 employees was €231,429.
• The median age of a fraud perpetrator in this study was 43 years old. In addition, perpetrators tended to be male (82 percent of cases), to be managers (50 percent of cases) and to have a university degree or postgraduate degree (55 percent of cases).
• Approximately 82 percent of the perpetrators in this study had never been charged with or convicted of a prior fraud-related offence.

While such figures can seem discouraging in certain ways, they provide important insight for anti-fraud professionals and any business or government leaders in understanding the nature of fraud. Knowing that tips are the leading method of detection, for example, tells us that hotlines are an important part of any fraud prevention strategy.

What do you think are some of the other important conclusions that we can draw from this study?