ACFE Report to the Nations: Fraud in the federal government costs nearly $200,000 each time it occurs

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Sarah Hofmann
ACFE Public Relations Specialist

“Waste, fraud and abuse” has become a pervasive soundbite in the 2016 U.S. presidential election, but just how much fraud is actually occurring in the government? In a study of 2,410 occupational fraud cases investigated by Certified Fraud Examiners (CFEs) between January 2014 and October 2015, 18.7 percent of the reported fraud instances occurred in government entities. Although the instances of reported fraud in the government occurred at an equal frequency between local, state and federal government, cases that occurred on the federal level cost a median of $194,000 each — a noticeably higher level than the median cost of fraud at the local and state government levels ($80,000 and $100,000 respectively).

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. Other key findings from the 92-page report include (all values in U.S. dollars):

Fraud is incredibly costly. The total cost of the frauds reported in the study was over $6.3 billion, with 23 percent of the cases costing more than $1 million. The study respondents estimated that the typical organization loses 5 percent of its annual revenue to fraud each year. 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.

Small businesses are especially at risk. The study found that organizations with fewer than 100 employees faced the same median cost per instance of fraud as companies with more employees. However, less than half of the smaller organizations had implemented some of the most basic anti-fraud controls like implementing a fraud hotline, and establishing a management review and code of conduct. 

Hotlines are becoming an expected control in most companies. In the study, CFEs reported that 60.1 percent of the organizations they worked with had a fraud reporting hotline in place, an 8.9 percent increase from the findings reported in 2010.

Physical documents are still key components in fraud. For the first time, respondents were asked how fraudsters attempted to cover their tracks. Even in such a technologically driven world, fraudsters are still relying on creating fraudulent physical documents, altering existing physical documents or destroying those documents.

The Report to the Nations also details findings such as how fraud risks varied by industry, how the implementation of anti-fraud controls affected exposure to fraud, the breakdown of fraud statistics by geographical region and the most common behavioral traits observed among fraud perpetrators.

The 2016 Report to the Nations is available for download online at ACFE.com/RTTN.

New Report Reveals Data Analysis as Most Effective Anti-Fraud Control

Download the Report today.

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John Warren, J.D., CFE
ACFE VP and General Counsel

It may be better and cheaper to prevent fraud than detect it, but it’s a fact of life in any organization that fraud will eventually happen. The tools we use to detect fraud are critically important. Data from the ACFE’s recent 2014 Report to the Nations on Occupational Fraud and Abuse suggest that organizations that proactively seek out fraud do a much better job of limiting their losses; whereas those who are reactive – relying on external or passive detection methods – tend to experience much larger fraud costs.

For those not familiar with the Report to the Nations, it is a bi-annual study based on actual cases of occupational fraud, with detailed information supplied by the Certified Fraud Examiners (CFEs) who investigated those cases. The 2014 Report contains data from 1,483 frauds that occurred in more than 100 countries.

We identified 18 common anti-fraud controls and asked our respondents which, if any, of these controls had been implemented by the victim organizations at the time their frauds occurred. We then compared the median loss and median duration of frauds based on whether each control was or was not present. 

What we found was that every control was associated with a significant reduction in median losses, ranging from 20% to 60% per scheme. Each control was also associated with faster fraud detection. (For a full list of our results, see page 38 of the Report.) This analysis is not a perfect measure of control effectiveness – remember, we’re looking only at frauds that have occurred, so we’re not able to measure the preventative impact of controls. But our data strongly suggests that anti-fraud controls have a measurable impact in reducing fraud losses. 

The control that scored the highest in our 2014 study was “proactive data monitoring and analysis.” Organizations that utilized proactive data monitoring experienced frauds with a median loss 60% lower than those without this tool, and they detected fraud 50% more quickly. Unfortunately, only a little more than one third of the victim organizations in our study conducted proactive data monitoring for fraud.  This low implementation rate may be a factor of cost. A typical small business may not have the financial resources or personnel necessary to conduct proactive monitoring. When we focused on larger organizations (those with 10,000 or more employees) we found a stronger implementation rate of 49%, but that still means half of the largest, most well-financed organizations were ignoring this tool. 

In the 2014 Report we’ve included a wealth of information about how frauds are committed, the highest risk areas for various departments and industries, and the characteristics of those who commit these crimes. We encourage readers to use this information to help determine where their organizations are most vulnerable to fraud, and then use the data we’ve gathered on controls and detection to design systems that will give them the best chance of catching these crimes early and limiting fraud losses.  

Find more details and read more Report findings at ACFE.com/RTTN.

Sneak Peek: New Report to the Nations Takes Fraud’s Temperature Worldwide

New Report out May 20 at ACFE.com/RTTN.

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Scott Patterson, CFE
ACFE Senior Media Specialist

Small businesses (those with fewer than 100 employees) still bear the brunt of fraud’s damaging effects. They are more often the victims of fraud cases than larger organizations, and their financial losses are disproportionately high. Another fraud fact: two out of three perpetrators are men, a persisting gender gap that shows no sign of closing.

These and other insights are detailed in the ACFE’s newly published 2014 Report to the Nations on Occupational Fraud and Abuse. The Report is based on data compiled from a study of 1,483 cases of occupational fraud that occurred worldwide between January 2012 and December 2013. All information was provided by the Certified Fraud Examiners (CFEs) who investigated those cases. The fraud cases in our study came from nearly 100 nations, providing a truly global view into the plague of occupational fraud.

A few of the other findings in the 80-page Report:

• Fraud schemes are extremely costly. The median loss caused by the occupational fraud cases in the study was $145,000. More than one-fifth of these cases caused losses of at least $1 million.
• Schemes can continue for months or even years before they are detected. The frauds in the study lasted a median of 18 months before being caught.
• Tips are key in detecting fraud. Occupational fraud is more likely to be detected by a tip than by any other method. The majority of tips reporting fraud come from employees of the victim organization.
•  Occupational fraud is a global problem. Though some findings differ slightly from region to region, most of the trends in fraud schemes, perpetrator characteristics and anti-fraud controls are similar regardless of where the fraud occurred.

Since the inception of the Report in 1996 (originally titled The Wells Report), the ACFE has released seven updated editions — in 2002, 2004, 2006, 2008, 2010, 2012, and the current version in 2014. Like the first Report, each subsequent edition has been based on detailed case information provided by Certified Fraud Examiners (CFEs).

With each new edition of the Report, the ACFE adds to and modifies survey questions in order to enhance the quality of the data. This evolution of the Report to the Nations provides a more meaningful statistical picture drawn from the experiences of CFEs and the frauds they encounter.

Download the Report at ACFE.com/RTTN on May 20.

‘Tis the Season – for Fraud?

GUEST BLOGGER

Scott Patterson
ACFE Senior Public Relations Specialist

We receive questions from the media about all sorts of fraud-related things. Business writers and reporters often ask about trends and the latest statistics on fraud – sometimes on specific issues like mortgage fraud, identity theft, healthcare fraud and others. Sometimes the need is for more general statistics, like those in the Report to the Nations on Occupational Fraud and Abuse.

It stands to reason, then, that during a certain time of year – such as the holidays, in this case – people would be interested to know whether fraud increases, decreases, or stays the same. What impact, if any, does holiday shopping and everything related to the season have on fraud occurrence?

That’s a question to which we didn’t have an answer. And neither did anyone else, so far as we could find. So we turned to our community of experts – Certified Fraud Examiners (CFE) – and we asked them.

On average, respondents told us that they believe fraud losses increase during the holiday shopping season by nearly 20 percent (compared to the rest of the year). And they think the single biggest contributing factor is increased financial pressure on perpetrators (61 percent), followed by an increased opportunity to commit fraud (24 percent) and increased rationalization for fraud (10 percent). These three factors are represented in Dr. Donald R. Cressey’s “Fraud Triangle” and their presence is considered necessary in order for fraud to occur.

Employee embezzlement/theft is the fraud scheme most likely to increase during the holidays, according to 56 percent of survey respondents – while half of them also reported that fraud by unrelated third parties, such as identity theft and con schemes, will increase.

Another area of concern in the findings: Despite seeing an apparent increase in fraud during the holidays, the majority of our survey respondents reported that their organization does not increase efforts to prevent or detect fraud during this time.

These survey results reinforce the connection between financial pressures and the risk of fraud. The holidays can be wonderful in many ways, yet they can also represent added stresses and pressure that may influence decision-making. During a tough economy, gift shopping might bust the budget. Holiday bonuses may be trimmed down or nonexistent. Job responsibilities and hours might be increased with fewer employees to do the work. These factors could lead to more fraud – which suggests that a certain degree of vigilance by business owners and other organizational leaders is appropriate.

You can read more about the study on Accounting Today. Also, check out the ACFE's Fraud and the Holidays infographic.

I’d like to thank the nearly 900 CFEs who participated in the survey, and also wish everyone a fraud-free holiday season.