Impact of Fraud in a Down Economy

According to a survey of Certified Fraud Examiners who investigated cases between 2006 and 2008, U.S. organizations lose an estimated seven percent of their annual revenues to fraud. The Association of Certified Fraud Examiners (ACFE) published the results of the survey in its highly-anticipated 2008 Report to the Nation on Occupational Fraud & Abuse.

The Report also found that: 

  • Fraud schemes tend to be extremely costly. The median loss caused by the occupational frauds in this study was $175,000. More than one-quarter of frauds involved losses of at least $1 million.  
  • Schemes frequently continue for years before they are detected. The typical fraud in our study lasted two years from the time it began until the time it was caught by the victim organization.
  • Frauds were most often committed by the accounting department or upper management, and most fraudsters were first-time offenders. Only seven percent of fraud perpetrators in the study had prior convictions and only 12 percent had been previously terminated by an employer for fraud-related conduct.
  • Occupational frauds are much more likely to be detected by a tip than by audits, controls or other means.
  • Small businesses are especially vulnerable to occupational fraud.
  • Seventy-eight percent of victim organizations modified their anti-fraud controls after discovering that they had been defrauded.

Source: Association of Certified Fraud Examiners 

The above facts are alarming and should be a call to arms for all business entities regardless of size. Prior to the economic downturn, many organizations were more focused on the top line and became content with growing revenues and increasing profits. Now with the current economic downturn placing significant stresses on revenues, profits and cash flow, many organizations are looking within to find a way to squeeze more out of their current operations. What they are finding is unpleasant and alarming.

You see the headlines every day, from Bernie Madoff all the way down to fraud being committed by bookkeepers, sales clerks and employees in the local business establishments. 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 ACFE survey indicated that fraud is generally discovered after the damage has been done. 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. EisnerAmper has assisted clients in designing, implementing and testing controls. In addition, if your controls have been circumvented or breached, EisnerAmper can assist in documenting and quantifying the breach for insurance claims or a civil proceeding against the offender. In extreme cases of significant fraud, EisnerAmper has worked 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 a down economy, 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 $175,000. More than one-quarter 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 and EisnerAmper has a team of experienced and credentialed experts to assist you in planning to prevent fraud or help you uncover and document a fraud loss. In addition to being Certified Public Accountants, our team members are credentialed as Certified Fraud Examiners and Certified in Financial Forensics.

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