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.
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.
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:
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: