By: Kasey Powell, CPA, CPE Kasey is a senior accountant, certified fraud examiner, and a member of the JMF Timber Practice Group.  

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This year represents the 20th anniversary of the inaugural Association of Certified Fraud Examiner’s (ACFE) Report to the Nation on Occupational Fraud and Abuse: 2016 Global Fraud Study. Dating back to 1996, the publication presents annual statistical data on the cost of occupational fraud, the perpetrators, the victims, and the various methods used to commit these crimes. The Report to the Nation’s one great contribution is that is has helped raise the general level of awareness about fraud risk.

The ACFE’s median estimate is that fraud costs organizations 5% of revenues each year. Applying this percentage to the 2014 Gross World Product (GWP) of $74.16 trillion results in a projected potential total fraud loss of up to $3.7 trillion worldwide, showing the growing need for education on fraud risk. The 2016 report contains an analysis of 2,410 cases of occupational fraud exceeding $6.3 billion that were investigated between January 2014 and October 2015. The fraud schemes in the study took place in 114 different countries throughout the world.

This blog post is intended to highlight information from the 2016 Report to the Nation that JamisonMoneyFarmer PC believes our clients should be aware of in order to both increase the prevention of fraud, and increase the detection of fraud in an efficient and effective manner.

The ACFE report is based on three primary categories of occupational fraud: asset misappropriation, corruption, and financial statement fraud.

  • Asset misappropriation (83.5%) is by far the most common scheme; however, it tends to have the lowest per scheme median loss ($125,000).
  • Corruption (35.4%) is the second most common scheme, and it also has the second highest per scheme median loss ($200,000).
  • Financial statement fraud (9.6%) comes in as the least common scheme, but the median loss per scheme blows every other type out of the water ($975,000).

This is not to say that a perpetrator will only use one category of fraud. 31.8% of cases involved more than one major fraud category. The most common combination was asset misappropriation and corruption, occurring in 23.5% of cases. In total, the median loss due to occupational fraud equals $150,000. A typical loss of $150,000 can be devastating to many organizations, especially when combined with the indirect fallout that often accompanies a fraud scheme.

Due to the high percentage of cases (83.5%) involving asset misappropriation, we want our clients to be aware of the most common types of asset misappropriation sub-schemes. These include billing, non-cash (ex. Inventory), expense reimbursements, skimming, check tampering, cash on hand, and payroll. The total loss caused by any type of fraud is also a function of how long it lasts before being detected.

To put that plainly, the longer perpetrators are able to go undetected, the greater financial harm they are able to cause to the victim. The reason we want our clients to be aware of these schemes is that many fraud losses are mitigated by early detection, as more than 25% of cases were uncovered in the first six months.

Increasing the odds that a scheme will be detected is a pillar of fraud prevention. The three most common detection methods for organizations include:

  • tips (39.1%),
  • internal audit (16.5%), and
  • management review (13.4%).

While external audits were not one of the most common detection methods (3.8%), they detected the third largest median loss ($470,000) of any detection scheme in the report. Organizations might be able to help reduce the duration and the cost of fraud by implementing controls and process that will increase the likelihood of active detection, such as the implementation of a reporting hotline or other tip policy (email, web-based, mailed letter, etc.), active management review, observant account reconciliation, and surveillance/monitoring techniques.

While you may think that your company is too small for fraud to occur, private companies incurred both the highest frequency (37.7%) and the highest median loss ($178,000) compared to public companies, government, not-for-profit, and others. Private companies and public companies represented two-thirds of all the cases included in the report. Moreover, small organizations (defined as having fewer than 100 employees) were the most common victims in the report (30%), while large organizations (defined as having 10,000+ employees) were the least common victims (20.5%). The median loss for both of these sized organizations was $150,000.

From an industry stand-point, the most common industries of victim organizations include banking and financial services (16.8%), government and public administration (10.5%), and manufacturing (8.8%). The highest median loss per industry saw mining at the top of the list ($500,000), followed by wholesale trade ($450,000) and then both the services (professional) and the agriculture/forestry/fishing/hunting industries ($300,000).

Surprisingly, while background checks are encouraged, we do not recommend solely relying on them as  a basis for determining an individual’s ability or drive to commit fraud. A total of 51% of victim organizations included in the study ran background checks on new employees. More than 88% of the background checks conducted by organizations in the report did not reveal any prior red flags, which under-scores the ACFE’s findings that the majority of perpetrators are not career criminals. That is, they are usually first-time offenders and typically do not take a job with the intention to defraud their employer.

The ACFE found that the six most common behavioral red flags were:

  • living beyond means;
  • financial difficulties;
  • unusually close association with a vendor or customer;
  • a general “wheeler-dealer” attitude involving shrewd or unscrupulous behavior;
  • excessive control issues and/or unwillingness to share duties; and
  • recent divorce or family problems.

Approximately 79% of the perpetrators in the report displayed at least one of these six red flags.

In conclusion, we hope that this summary of the Report to the Nation helps you become more aware of the increasing threat of fraud in every organization. We want to help put our clients in a better position to first prevent fraud, and if it occurs, to enable them to detect the fraud in an efficient and effective manner. If you have any comments, want any further information on the Report to the Nation, fraud in general , or prevention and detection methods,  or if you have suspicion of fraud occurring at your organization and would like JamisonMoneyFarmer PC to investigate, please contact Kasey R. Powell, CPA, CFE at (205) 366-4040 or at kpowell@jmf.com.