The 11th biennial Report to the Nations on Occupational Fraud and Abuse was issued by the Association of Certified Fraud Examiners (ACFE) earlier in 2020. Since its inception in 1996, the study has focused on occupational fraud and abuse, which is defined as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”
The findings from the 2020 study provide updated insight on fraud mechanics and how the key components of organizational abuse have remained constant. For example, losses caused by managers are always many times higher than those caused by lower-level employees, but they occur less often.
As in previous editions, fraud is classified into three categories using the “Fraud Tree” methodology: financial statement fraud, corruption, and asset misappropriation. The latest survey shows that asset misappropriation represents 53% of all reported fraud cases, with billing and noncash schemes being the most common fraud. Interestingly, the same schemes were mentioned in the first 1996 study, and it would have been reasonably expected that such long-term awareness and good documentation of these schemes would have led to a diminished frequency. Still, they produce combined losses between $78,000 and $100,000 per case.
Here are a few fraud facts from the 2020 publication:
• Typical fraud cases last 14 months and cause a loss of $8,300 per month.
• Asset misappropriation schemes are the most common but least costly; median losses per case are $125,000. Financial statement fraud schemes are the least common but the most costly; average losses per case are $1.5 million.
• Billing, payroll, and check tampering schemes are more likely in small businesses.
• More than half of all occupational frauds come from operations, accounting, sales, and executive departments.
• Out of more than 3.3 billion people in the global workforce, there will always be a fraction of dishonest employees causing a loss of about 5% of revenues to fraud each year. Projected against the 2019 gross world product of $90.52 trillion, it equates to $4.5 trillion loss to fraud.
The 2020 study also reemphasizes the golden rule for fraud fighters: the earlier a fraud is detected, the less the total loss. For example, the median loss of a six-month fraud is $50,000; it grows to $740,000 if it continues over 60 months.
The report also provides the most common characteristics of a wrongdoer: male (they perpetrate 72% of all frauds), age 35 to 45 (37%), holds a university degree or higher education (64%), an employee (41%) or manager (35%), has been with the company for one to five years (46%), and is experiencing financial difficulties (26%) or living beyond their means (42%) Living beyond means has been a red flag in every study since 2008.
Tips are the most common method of detection, accounting for 43% of cases. Internal audit departments discover only 15% of all fraud cases, even though internal audit departments operate in 74% of organizations. Likewise, external audit of financial statements as a proactive anti-fraud control exists in 83% of organizations, but, by itself, it does not ensure that the fraud will be prevented.
Other anti-fraud controls look more promising and have evolved with time:
• Hotlines were implemented by 51% of companies in 2010 and by 64% of companies 10 years later.
• An anti-fraud policy was implemented by 43% of companies in 2010 and by 56% of companies in 2020.
• Fraud training for both employees and managers underwent an average increase of 10% over 10 years.
These controls are associated with the most effective anti-fraud programs. When implemented with a strong ethical tone at the top, it indicates the seriousness of the organizational efforts in preventing and combating fraud.
When fraud is discovered, the victim organization has an option to report the wrongdoing to authorities. In most cases, only internal actions are taken against the perpetrator, which may include termination, settlement agreement, or probation. The main reason for nonreporting is a fear of bad publicity. This may allow fraudsters to continue to perpetuate frauds elsewhere. In addition, many organizations do not recover the losses, making legal prosecution less attractive.
The 2020 Report to the Nations on Occupational Fraud and Abuse is a valuable resource that summarizes many aspects of occupational fraud and is extremely useful for CPAs. The publication provides a list of simple, low-cost steps CPAs and business owners can take to protect their assets. As members of the professional community, we have to assume the role of educators and circulate the knowledge of fraud to the public. Moreover, staying informed can help detect specific fraud risks and evaluate the control systems that address the probability of fraud.
Irina Balashova, CPA, CFE, CIA, is a senior associate with Forensic Resolutions Inc. in Philadelphia and Westmont, N.J. She can be reached at firstname.lastname@example.org.