Update 2016 - Impact of Fraud in a Down Economy

According to the most recently released survey by the Association of Certified Fraud Examiners, organizations worldwide lose an estimated 5% or a staggering $3.7 trillion dollars of their annual revenues to fraud.  The Association of Certified Fraud Examiners (ACFE) published the results of the survey in its recently and highly-anticipated 2016 Report to the Nation on Occupational Fraud & Abuse.  

The Report also found that: 

• Fraud schemes tend to be extremely costly for the victims. The median loss caused by the occupational frauds in this study was $150,000. More than 23% of frauds involved losses of at least $1 million.  This is up slightly from the last survey at 22%.
• Schemes frequently continue for years before they are detected. The typical fraud in our study lasted 18 months from the time it began until the time it was caught by the victim organization.
• Perpetrators with higher levels of authority tend to cause much higher losses. The median loss among frauds committed by executives and higher level employees was of $703,000 while the median loss caused by lower level employees was $65,000.
• In cases where there was collusion between two or more perpetrators, the medial loss rose to in excess of $150,000 and in some cases exceeded $633,000.
• Occupational frauds are much more likely to be detected by a tip than by audits, controls or other means.  The majority of frauds are reported by a tip from employees of the victimized organization. 
• Once again the study showed that organizations with a Fraud Hotline had more success in uncovering fraud due to a tip.  Organizations with a tip hotline in place experiences with fraud were 50% less costly.  The hotlines also resulted in a fraud being detected 50% sooner.
• Small businesses are equally vulnerable to occupational fraud as larger organizations.  Although when comparing the losses, the smaller organizations tend experience a much greater impact.
• Most occupational fraudsters are first-time offenders.  Approximately 5% of occupational fraudsters had previously been convicted of a fraud related offense.
• The presence of anti-fraud controls is notably correlated with significant decreases in in the cost and duration of occupational fraud schemes.  Organizations that had anti-fraud controls experienced approximately 54% lower losses and 50% quicker time-to-detection than organizations lacking controls.
• Less than half of all victim organizations recover any losses that they suffer due to fraud.  At the time of the study, 58% of the victimized organization had not recovered any of their fraud related losses.  Only 12% received a full recovery.

The above facts are alarming and should be a call to arms for all business entities regardless of size.  ,  The  sustained slow economic growth is placing continued significant stresses on revenues, profits and cash flow, and as a result many organizations are looking within to find way to squeeze more out of their current operations.  This atmosphere presents itself the opportunity for a fraudster to initiate their ilicit behavior. 

You see the headlines every day, from major cases such as Bernie Madoff, Stanford Financial, and other big organizations all the way down to fraud committed in by bookkeepers, sales clerks and employees in the local business establishments.  Just create a Google Alert on “Fraud” and “Embezzlement” and see the hits you receive every day.

Many business owners and management officials are asking, how could this happen?  Why weren’t we prepared?  What can we do to fix the problem?    Unfortunately, the recent ACFE survey continues to indicate that fraud is generally discovered after the damage has been done.  This is typical as the study shows most fraud schemes go on for a period of 18 months or more before being uncovered.  Fraud affects businesses around the world and adds to the cost of doing business and as a result ends up costing the consumer in higher prices.  Based on the study, fraud is a threat to all organizations across the globe. 

However, this does not have to be the case.  With the proper management mindset and planning, controls and procedures can be designed and put in place to help reduce the opportunity for a fraud to be committed.  Professional advisors have assisted clients in designing, implementing and testing anti-fraud controls.  In addition, if your controls have been circumvented or breached, your advisors can assist documenting and quantifying the breach for insurance claims and/or a civil proceeding against the offender.  In extreme cases of significant fraud, they can even work with law enforcement to help quantify the losses and bring the offender to justice. 

Important to remember is that while a majority of fraud cases rise to the surface in low- and slow-growth economic times, your organization should always be on the lookout for the warning signs of fraud.  As stated previously, the median loss caused by the occupational frauds in this study was $145,000. More than 20% of frauds involved losses of at least $1 million.  This is a staggering statistic.  The good news is that planning today can help prevent a loss tomorrow.