October 18, 2012

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According to the 2012 “Report to the Nations on Occupational Fraud and Abuse” issued by the Association of Certified Fraud Examiners (ACFE), a typical business loses 5 percent of its revenues to occupational fraud each year. This figure translates to annual fraud loss of more than $3.5 trillion around the world.

Is your company at risk? Familiarizing yourself with common fraud schemes and perpetrator profiles can help you avoid losing what you’ve worked so hard to build. Consider these interesting tidbits from the ACFE study:

Types of Fraud

Occupational fraud generally falls into three categories: asset misappropriation, corruption and financial statement fraud. The most common frauds involve asset misappropriation, which includes skimming, billing and payroll schemes, expense reimbursement fraud and cheque tampering. In Canada, 36 percent of the reported cases were billing schemes.

Corruption includes misuse of influence, such as bribery, conflicts of interest in purchasing or sales, illegal “gratuities” and extortion. These types of fraud accounted for 29 percent of Canadian cases.

Financial statement fraud involves schemes like asset or revenue overstatement or understatement. While only 3.4 percent of the Canadian cases were financial statement fraud, these types of schemes are typically the most damaging, with a median loss of $1 million among all the cases included in the ACFE report.

How Fraud Is Detected

Occupational fraud is more likely to be detected by a tip than by any other method. Just over half of tips come from employees, with customers accounting for almost a quarter of fraud tips. Other tips come from a variety of other sources, including anonymous tipsters, vendors and even competitors.

The timing of detection appears to make a significant difference in cost to the companies victimized. For example, frauds that were first detected by the least proactive means — police, external audit, and by confession or accident — cost companies the most. Frauds discovered by internal audit, document examination, IT controls, management review and account reconciliation incurred substantially lower losses, so it’s important to be aggressive about detection.

Unfortunately, smaller companies suffer the highest median largest losses due to fraud. Those with fewer than 100 employees are the most common victims. The ACFE believes that this may be due to the fact that smaller businesses typically use fewer anti-fraud controls.

Not surprisingly, privately held companies are more likely to be victims of fraud than public companies or not-for-profits.

Who’s Responsible?

Approximately 42 percent of fraudsters are employees, with managers accounting for about 38 percent and executives accounting for 18 percent. More than three-quarters of frauds in the study were committed by people in six departments: accounting, operations, sales, executive/upper management, customer service and purchasing.

In Canada, perpetrators at the manager level caused the greatest median losses — $143,000. Male perpetrators cause more significant losses than females, and older perpetrators (age 51+) tend to cause greater losses than younger fraudsters. Most perpetrators are first-time offenders with clean employment records, but in 81 percent of cases, the fraudsters displayed at least one behavioral “red flag” that might have indicated a problem.

For example, in 36 percent of cases, the fraudsters were living beyond their means. Twenty-seven percent were having financial difficulties and another 19 percent had unusually close associations with vendors.

What Can You Do?

The lessons here are obvious: Proactive anti-fraud measures work, and targeted fraud-awareness training is mandatory. Encourage your employees, customers and vendors to report any suspicions they might have via a hotline or other anonymous reporting vehicle. The ACFE also points out that strict ethics at the top of the organization sets the right example for co-workers.

Good internal controls are instrumental in preventing fraud. We can help you review your current processes and anti-fraud measures.

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