New ACFE Study: Knowledge Is Power in the Fight Against Fraud

Every two years, the Association of Certified Fraud Examiners (ACFE) publishes a study detailing the costs, schemes, perpetrators and victims of occupational fraud. "Occupational Fraud 2022: A Report to the Nations" was recently released. It covers more than 2,100 cases of white-collar crime, occurring in 133 countries. Consistent with the previous study, the 2022 report estimates that the typical organization loses 5% of its revenues each year to fraud.

For a baseline estimate for how much your organization might have lost to occupational fraud over the last 12 months, multiply your 2021 revenue by 5%. For example, if you had $1 million in revenue, your estimated loss would be $50,000. This calculation can be sobering for many small business owners who adopt an "it can't happen here" mindset.

What's more, the 5% benchmark is a conservative estimate of fraud losses because many frauds go undetected or unmeasured. Plus, some losses are indirect, including lost productivity, reputational damage and the related future loss of business. In other words, the true losses from asset misappropriation, corruption and financial statement fraud are probably much higher than the study suggests. Many of these losses are never fully recovered.

Tracking the Data

To help assess fraud risks, business owners and managers should review the following statistics from the 2022 study. (See also "Top 10 Trends in White Collar Crime" below.)

Median losses. Globally, the median loss caused by the frauds in the 2022 study was $117,000. However, losses tend to be higher for smaller organizations. The median loss for organizations with fewer than 100 employees was $150,000.

Perpetrators. The biggest fraud losses were caused by dishonest owners and executives (a median loss of $337,000). Most fraudsters had no previous criminal record. But, before being caught, many white-collar criminals exhibited classic red flags, such as living beyond their means, having unusually close ties with vendors or customers, and experiencing personal financial difficulties.

Duration. The longer fraud schemes go undetected, the more financial losses they tend to cause. From start to finish, the median fraud scheme in the 2022 study took 12 months to uncover. The average loss per month was $8,300.

Role of cryptocurrency. New to the study in 2022 were statistics on the role cryptocurrency plays in fraud. The study found that 8% of schemes involved cryptocurrency. In cases involving crypto, it was most commonly used to make bribery and kickback payments (48%) and convert stolen assets (43%).

Types of schemes. The study identifies three basic types of frauds: 1) asset misappropriation (representing 86% of cases in the 2022 study), 2) corruption (50% of cases), and 3) financial misstatement (9% of cases). Median losses were lowest for asset misappropriation ($100,000) and highest for financial misstatement ($593,000). Many cases involved more than one type of fraud scheme. Examples of corruption schemes include bribery, extortion, bid rigging and kickbacks.

Finding Fraud

The 2022 study reports that the top three methods of detection were:

1.     Tips (42%),

2.     Internal and external audit (20%), and

3.     Management review (12%).

Employees made more than half (55%) of the fraud tips in the study. Other common whistleblowers included customers (18%) and vendors (10%). Anonymous reports accounted for 16% of all tips.

Telephone hotlines can help people report suspicious behaviors, but other reporting mechanisms, such as online forms and email, have become more popular in recent years. Whistleblowers often view these alternatives as more convenient and confidential than phone calls. In the study, organizations with fraud reporting mechanisms detected frauds more quickly and lost less per incident than those without hotlines.

Specifically, the average duration of frauds at victim-organizations with hotlines was 12 months (compared to 18 months without). And the median loss at victim-organizations with hotlines was $100,000 (compared to $200,000 without).

Training can help educate employees about reporting mechanisms, common schemes in a particular industry and the warning signs of fraud. The ACFE says that fraud training combined with a formal reporting mechanism dramatically increases the likelihood that your organization will receive fraud tips.

Fraud training also sends a powerful message about your intention to fight fraud no matter where it originates. Employees must perceive a high probability that fraudulent activity will be detected. The perception of detection is often enough to dissuade them.

Preventing Fraud

Robust internal controls are the best defense against fraud. What are the critical elements of an internal control system? In terms of lowering fraud losses, the most effective internal controls in the 2022 study were:

ControlPercent Reduction in Fraud Loss
Job rotation/mandatory vacation policies54%
Hotline or other reporting mechanism50%
Surprise audits50%
Proactive data monitoring/analysis47%
Anti-fraud policy45%
Fraud training for employees45%
Formal risk assessments45%

 

On the flip side, weak internal controls often provide dishonest people with opportunities to commit fraud. The 2022 study found that nearly half of cases were correlated with lack of internal controls or management override of internal controls. Unfortunately, weak controls are common among smaller organizations — a situation that has been exacerbated by the COVID-19 pandemic.

Combating Fraud during the Pandemic

The pandemic put additional strain on many organizations, which may have expanded the motives for fraud. For example, some managers who felt pressure to meet financial goals might have hidden weak performance by reporting fictitious sales or overstating asset values on their companies' balance sheets. Alternatively, factory workers who worked fewer hours during the pandemic might have resorted to stealing company assets to help make ends meet.

The pandemic also may have expanded the opportunities for fraud to happen at some organizations. Respondents to the 2022 ACFE study reported experiencing additional fraud risks from pandemic-related changes to:

  • Organizational staffing,
  • Operational processes,
  • Internal controls,
  • Strategic priorities, and
  • Anti-fraud programs.

To illustrate, recent supply chain disruptions have caused a flurry of unusual financial transactions, such as expedited orders, cancelled deals and refunds. During a global crisis, emergency requests and software updates are less likely to raise a red flag than under normal conditions. The shift to remote work created additional fraud opportunities. People working from home generally have limited direct contact with superiors and co-workers, and home networks may not be as secure as on-site networks.

The 2022 study covers frauds that were detected from January 2020 to September 2021, and it typically takes about a year to detect a fraud scheme. So many cases included in the ACFE's 2022 biennial study began prior to the start of the pandemic. That means the latest study doesn't capture all of its effects on white collar crime.

The ACFE states, "We anticipate seeing additional pandemic-related factors underlying the cases in our 2024 study, when many more frauds that began during the pandemic will have been detected and investigated."

We Can Help

Your financial advisors can help reinforce your internal controls and investigate if you suspect fraud. Doing so can potentially save your organization thousands, if not millions, of dollars in losses and put everyone on alert that fraud won't be tolerated.

 

Top 10 Trends in White Collar Crime

The 2022 Report to the Nations revealed the following key trends from 2012 through 2022:

  1. Faster detection. The median duration for fraud schemes fell from 18 months in 2012 to 12 months in 2022.
  2. Reduced losses. Thanks in part to faster detection of scams, the median fraud loss fell 16% from $140,000 in 2012 to $117,000 in 2022.
  3. More training to combat fraud. Fraud training programs contributed to reductions in fraud losses and duration of schemes. Over the past decade, the use of fraud training has increased by 14% for employees and 12% for executives.
  4. Increased popularity of hotlines. Organizations are recognizing the importance of fraud hotlines to encourage tips from employees and other stakeholders. Respondents with a reporting mechanism increased from 54% in 2012 to 70% in 2022.
  5. Increase in male perps. The percentage of frauds perpetrated by men has increased from 65% in 2012 to 73% in 2022.
  6. Increased losses from female perps. The gender gap in the amount stolen by men vs. women has narrowed. In 2012, the median loss from male perpetrators was $200,000 and from female perpetrators was $91,000. In 2022, the median loss from men was $125,000 and from women was $100,000.
  7. Increase in theft by high-level employees. The percentage of crimes committed by managers, executives and owners rose from 56% in 2012 to 62% in 2022.
  8. Increase in corruption. In 2012, 33% of cases involved corruption, compared to 50% in 2022.
  9. Increase in collaboration. In 2012, 42% of cases involved more than one individual, compared to 58% in 2022.
  10. Change in fraud outcomes. More organizations are pursuing civil remedies against alleged perpetrators, rising from 23% of cases in 2012 to 29% of cases in 2022. But criminal prosecutions have become less common, down from 65% of cases in 2012 to 58% of cases in 2022.

 

 

Categories: May 2022, Monthly Bulletins
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