Every two years since 1996, The Association of Certified Fraud Examiners (ACFE) has produced Report to the Nation on Occupational Fraud and Abuse, a comprehensive analysis of the causes and effects of occupational fraud in the United States. The Audit & Accounting Alert last reported on the study in September 2018. The stated goal of the ACFE was to “compile detailed information about occupational fraud cases in five critical areas:
- The methods by which occupational fraud is committed,
- The means by which occupational frauds are detected,
- The characteristics of the organizations that are victimized by occupational fraud,
- The characteristics of the people who commit occupational fraud,
- The results of the cases after the frauds have been detected and the perpetrators identified.”
In 2022, the twelfth edition is based on survey data provided by certified fraud examiners (CFE) from 2,110 actual cases across 133 countries and 23 industry categories. While some results show dramatic improvement since the 2018 report, significant aspects of the fraud landscape are similar or have gotten more severe.
Consistent over the last few years, the median response by CFEs of the annual loss to organizations from fraud has been 5% of revenue. Applying that percentage to Gross World Product, the authors theorized that the potential cost of fraud worldwide is over $4.7 trillion annually. In comparison, the first report in 1996 reported an annual amount of $400 billion lost in the US alone, while in 2018 the global amount was $4 trillion.
Owners/executives still account for a small percentage of cases, though up to 23% versus 19% in 2018. However, the median loss per case dropped from $850,000 to $337,000. The overall median loss of $117,000 was slightly less than the $130,000 in the prior report. Losses of $1 million or more at 22% of cases was comparable to the past, while the average loss per case dropped by $1 million to $1.7 million. Men are still the major perpetrators outdoing women by almost three to one, though the median losses caused by men were only 25% higher than for the women.
Asset misappropriation schemes accounted for a comparable 86% of the cases, but only incurred a median of $100,000 in losses, while financial statement fraud schemes were present in only 9% of the cases but incurred about $600,000 of median losses, a 25% improvement. Corruption appeared 50% of the time, sometimes in conjunction with one or both of the other two types, up from 38% in 2008.
The most common and costly asset misappropriation schemes entailed billing (shell company, personal purchases), theft of non-cash assets (larceny, false sales and shipping), expense reimbursements, and check and payment tampering (forged maker or endorsement, altered payee),.
The external independent audit, employed by 82% of companies in the study, continued to be the most common anti-fraud control. Still, only 4% of frauds were detected by routine audits, while tips were the most common detection method, representing about 40-43% in the last three studies. Furthermore, detection of fraud through tips was about 16% higher in companies that had hotlines. Employees were found to provide over 55% of the tips, followed by outside parties with almost a third. The figures in this paragraph and the next have not changed much since 2018.
Internal audits revealed 16% of frauds, while management review was responsible for detection of 12%. Overall, companies with anti-fraud controls in place still experienced lower fraud losses and quicker detection than companies without them. Other anti-fraud controls found in at least half of the companies surveyed included a code of conduct, management certification of financial statements, an independent audit committee, employee support programs, anti-fraud policies, and fraud training.
The top methods of concealing fraud in order of prevalence were:
1. Created fraudulent physical documents (39%)
2. Altered physical documents (32%)
3. Altered electronic documents or files (25%)
4. Destroyed physical documents (23%)
5. Created fraudulent electronic documents or files (28%)
Small businesses continue to be more susceptible to fraud, typically because of more limited resources for anti-fraud controls. While corruption, non-cash, financial statement fraud, and billing manipulation factors stand out much more at larger firms, most other factors, such as check & payment tampering, skimming, payroll, expense reimbursements, cash larceny, and cash on hand, plague smaller firms almost as much or more. Lack of, or overriding, internal controls were the biggest contributors to fraud.
Over half (57%) of victim organizations ran background checks. 21% of those background checks revealed warning signs, but the individuals were hired anyway. The checks were 10% higher than in 2018, but the instances of warning signs doubled.
Since the report was first initiated, the four most prevalent warning signs have always been 1) living beyond means, 2) financial difficulties, 3) unusually close association with a vendor or customer, and 4) excessive control issues or unwillingness to share duties
About 60% of perpetrators that were caught were terminated, while others face lesser punishment, and 7% were not punished at all. Owners or executives were much less likely to be punished as compared to other employees. The rate of criminal litigation has held steady over the past four years at 58%, while civil litigation has increased from 23% to 29%. Sufficient internal discipline was the most likely reason not to pursue litigation in 2022, while fear of bad publicity was most likely in 2018, and second most likely in 2022.
A major new emerging fraud category revealed in the 2022 report involves cryptocurrency schemes, which amounted to 8% of all cases. Significant types include bribery and kickback payments, conversion of misappropriated assets, laundering, misappropriation of cryptocurrency assets, and manipulation of cryptocurrency assets on financial statements.
Just as past reports have shown, the more things change, the more they remain the same. While methods and techniques change with the ongoing technological advancements in business operations, the underlying concepts driving motivations and prevention continue to endure. Persistent diligence both in developing effective anti-fraud techniques and in assuring an ethical and moral atmosphere will be critical in the never-ending race to stay abreast of malevolent fraudsters.
Further details can be found at Occupational Fraud 2022: A Report to the Nations.