Occupational Fraud Costs Global Businesses an Estimated $3.7 Trillion


Organizations lose approximately five percent of their revenue each year to internal theft and fraud, according to the Association of Certified Fraud Examiners' (ACFE) recent Report to the Nations on Occupational Fraud and Abuse. Globally, this translates to an estimated $3.7 trillion lost, not from employees stealing the occasional notepad, but from three primary classes of occupational fraud — asset misappropriations, corruption and financial-statement fraud — and many times from cases involving more than one of these crimes.

Additional key findings from the report include —

  • The average loss from fraud was $145,000, although 22% of cases involved a loss of over $1 million;
  • It took organizations an average of 18 months to detect fraudulent activity  from the time it began;
  • Tips — almost half of which are provided by employees — are the most common way (40%) fraud is detected, double the rate of any other detection method;
  • Hotlines make it much more likely organizations will receive such tips, allow them to detect fraud 50% more quickly and reduce the cost of fraudulent activity by 41%;
  • Anti-fraud controls significantly reduce the cost of and increase the ability to detect fraudulent schemes;
  • The smaller the organization, the more significant the impact of occupational fraud;
  • Fraudsters cost businesses more when working together; costing an average of $200,000 with two perpetrators and over $500,000 when more than four are involved;
  • Industries most commonly victimized are banking and financial services, government and public administration and manufacturing sectors;
  • Approximately 77% of the frauds reported in the study were committed within one of seven departments: accounting, operations, sales, executive/upper management, customer service, purchasing and finance; and
  • Many organizations (58%) never recover the money stolen and only 14% fully recovered the funds.

Based upon the findings, the ACFE researchers made the following recommendations —

  1. Implement proactive detection measures. The longer fraudulent activity continues, the more financial damage it causes, making proactive detection measures — hotlines, management review procedures, internal audits and employee monitoring mechanisms — vital for stopping fraud early and limiting losses. Given that employee tips are the most common method for uncovering fraud, both internal and external reporting processes should be available for making anonymous or confidential tips. Anti-retaliation policies should be in place to help encourage such tips.
  2. Don’t rely on background checks to warn of bad behavior. Most fraudsters are first-time offenders and 82% have no history of employment-related misconduct. Consequently, while background checks may be useful to screen out bad applicants, employers should not rely on them to predict future behavior. Instead, regularly monitor employees for fraudulent behavior.
  3. Enhance external audits. While independent, external audits serve a vital role in organizational governance, they are minimally effective — only 3% of reported cases detected by external audits — and should not be relied upon as an organization's primary fraud-detection method, but reinforced with additional internal measures.
  4. Small businesses require extra vigilance. Given the disproportionate impact of occupational fraud on the smallest organizations in the ACFE study, together with the fact that they are often under-protected from such activity, small businesses are urged to find cost-effective ways to assess their particular vulnerabilities and increase their anti-fraud controls in those areas.
  5. Focus on prevention, not recovery. Because it can be difficult — if not impossible —to recover the losses from fraudulent activity, it is far more cost-effective to focus on preventing such activity in the first place.
  6. Train employees to recognize red-flag behavior. Over 90% of fraudsters exhibit certain common behavior. The most common are living beyond one’s means (43.8%), personal financial difficulties (33%), an unusually close association with a vendor or customer (21.8%) and exhibiting control issues with an unwillingness to share duties (21.1%).

Anti-fraud training  is an essential component of an organization’s fraud-prevention efforts.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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