Update - Impact of Fraud in a Down Economy

According to a recent survey released by the Association of Certified Fraud Examiners, between 2010 and 2010 organizations worldwide lose an estimated five percent 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 2012 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 $140,000. More than one-fifth 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 eighteen 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 $573,000 while the median loss caused by lower level employees was $60,000.
  • 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.
  • Small businesses are especially vulnerable to occupational fraud.  As with past studies, smaller organizations suffered larger median losses.  These organizations tend to have less anti-fraud controls which increase their vulnerability to fraud. 
  • Most occupational fraudsters are first-time offenders.  Approximately 87% of occupational fraudsters had never been charged or 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.  Seventy-eight percent of victim organizations modified their anti-fraud controls after discovering that they had been defrauded.  Organizations that had anti-fraud controls experienced considerably lower losses and time-to-detection than organizations lacking controls.
  • Nearly half of all victim organizations do not recover any losses that they suffer due to fraud.  At the time of the study 49% of the victimized organization had not recovered any of their fraud related losses.

The above facts are alarming and should be a call to all arms for all business entities regardless of size.  Prior to the economic downturn of many organizations were more focused on the top line and became content with growing revenues and increasing profits.  Now with the sustained economic downturn placing continued significant stresses on revenues, profits and cash flow, many organizations are now looking within to find 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, Stanford Financial, all the way down to fraud committed in 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 that fraud is generally discovered after the damage has been done. 

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.  EisnerAmper, has assisted clients in designing, implementing and testing anti-fraud controls.  In addition, if your controls have been circumvented or breached, EisnerAmper can assist documenting and quantifying the breach for insurance claims and/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 $140,000. More than twenty percent 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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