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The Association of Certified Fraud Examiners (ACFE) 2012 Report to the Nations on Occupational Fraud and Abuse is based on data compiled from a study of 1,388 cases of occupational fraud worldwide between January 2010 and December 2011.
Survey participants estimated that the typical organisation loses 5 per cent of its revenues to fraud each year. Applied to the estimated 2011 Gross World Product, this figure translates to a potential projected global fraud loss of more than $3.5 trillion. The median loss caused by the occupational fraud cases in the study was $140,000. More than one-fifth of these cases caused losses of at least $1 million. The frauds reported to the association lasted a median of 18 months before being detected. 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 organisation.
Occupational fraud is a significant threat to small businesses. The smallest organisations in the study suffered the largest median losses. These organisations typically employ fewer anti-fraud controls than their larger counterparts, which increases their vulnerability to fraud.
As in prior ACFE research, the industries most commonly victimised in the association’s current study were the banking and financial services, government and public administration, and manufacturing sectors.
The presence of anti-fraud controls is notably correlated with significant decreases in the cost and duration of occupational fraud schemes. Victim organisations that had implemented any of 16 common anti-fraud controls experienced considerably lower losses and time-to-detection than organisations lacking these controls.
Nearly half of victim organisations do not recover any losses that they suffer due to fraud. As of the time of our survey, 49 per cent of victims had not recovered any of the perpetrator’s takings; this finding is consistent with our previous research, which indicates that 40 to 50pc of victim organisations do not recover any of their fraud-related losses.
Perpetrators with higher levels of authority tend to cause much larger losses. The median loss among frauds committed by owner/executives was $573,000, the median loss caused by managers was $180,000 and the median loss caused by employees was $60,000.
The vast majority (77 per cent) of all frauds in our study were committed by individuals working in one of six departments: accounting, operations, sales, executive/upper management, customer service and purchasing. This distribution was very similar to what the association found in the previous, 2010 study.
Most occupational fraudsters are first-time offenders with clean employment histories. About 87pc of occupational fraudsters had never been charged or convicted of a fraud-related offence, and 84pc had never been punished or terminated by an employer for fraud-related conduct.
In 81pc of cases, the fraudster displayed one or more behavioural red flags that are often associated with fraudulent conduct. Living beyond means (36pc of cases), financial difficulties (27pc), unusually close association with vendors or customers (19pc) and excessive control issues (18pc) were the most commonly observed behavioural warning signs.
The nature and threat of occupational fraud is truly universal. Though the ACFE research noted some regional differences in the methods used to commit fraud — as well as organisational approaches to preventing and detecting it — many trends and characteristics are similar regardless of where the fraud occurred.
Providing individuals a means to report suspicious activity is a critical part of an anti-fraud programme, it is claimed. Fraud reporting mechanisms, such as hotlines, should be set up to receive tips from both internal and external sources and should allow anonymity and confidentiality. Management should actively encourage employees to report suspicious activity, as well as enact and emphasise an anti-retaliation policy.
External audits should not be relied upon as an organisation’s primary fraud detection method. Such audits were the most commonly implemented control in the study; however, they detected only 3pc of the frauds reported to us, and they ranked poorly in limiting fraud losses. While external audits serve an important purpose and can have a strong preventive effect on potential fraud, their usefulness as a means of uncovering fraud is limited.
Targeted fraud awareness training for employees and managers is a critical component of a well-rounded programme for preventing and detecting fraud. Not only are employee tips the most common way occupational fraud is detected, but the research suggests that organisations that have anti-fraud training programs for employees, managers and executives experience lower losses and shorter frauds than organisations without such programs in place. At a minimum, staff members should be educated regarding what actions constitute fraud, how fraud harms everyone in the organisation and how to report questionable activity.
Our research continues to show that small businesses are particularly vulnerable to fraud. These organisations typically have fewer resources than their larger counterparts, which often translates to fewer and less-effective anti-fraud controls. In addition, because they have fewer resources, the losses experienced by small businesses tend to have a greater impact than they would in larger organisations. Managers and owners of small businesses should focus their anti-fraud efforts on the most cost-effective control mechanisms, such as hotlines, employee education and setting a proper ethical tone within the organisation. Additionally, assessing the specific fraud schemes that pose the greatest threat to the business can help identify those areas that merit additional investment in targeted anti-fraud controls.
Most fraudsters exhibit behavioural traits that can serve as warning signs of their actions. These red flags — such as living beyond one’s means or exhibiting excessive control issues — generally will not be identified by traditional internal controls. Managers, employees and auditors should be educated on these common behavioural patterns and encouraged to consider them — particularly when noted in tandem with other anomalies — to help identify patterns that might indicate fraudulent activity.
The cost of occupational fraud — both financially and to an organisation’s reputation — can be acutely damaging. With nearly half of victim organisations unable to recover their losses, proactive measures to prevent fraud are critical. Management should continually assess the organisation’s specific fraud risks and evaluate its fraud prevention programs in light of those risks.
All information was provided by the Certified Fraud Examiners (CFEs) who investigated those cases. The fraud cases in the study came from 94 nations — providing a global view into occupational fraud.
Since the inception of the Report in 1996 (originally titled The Wells Report), the anti-fraud practitioner group has released six updated editions — in 2002, 2004, 2006, 2008, 2010 and the current version in 2012. Like the first Report, each edition has been based on case information provided by Certified Fraud Examiners (CFEs).