Occupational Fraud Update 2022: New Data on Crytpo and COVID
April 05, 2022
By Hubert Klein and Michael Bentivegna
This article was originally published on July 23, 2018 and has been updated to reflect current circumstances and events through April 5, 2022.
Occupational fraud is the use of one’s position to exploit, through misuse or misappropriation, an organization’s resources and assets for personal gain. Most people recognize and understand occupational fraud through more common terms such as embezzlement or corruption. Every two years, the Association of Certified Fraud Examiners (“ACFE”) conducts a survey to provide insight into the potential cost and financial impact of occupational fraud on businesses. The results of this survey are published in the ACFE’s Report to the Nations.
The survey indicates the numerous schemes that potential perpetrators have at their disposal if they choose to target an organization. However, these schemes can all be generally categorized into one of three categories: corruption, asset misappropriation and financial statement fraud. According to the ACFE’s Occupational Fraud 2022: A Report to the Nations, of these three categories, asset misappropriation occurs at a higher rate (86% of fraud cases in 2020 and 2021) as compared to those for corruption (50%) and financial statement fraud (9%), respectively. A new key finding in the 2022 report is the uptick in fraud cases involving cryptocurrency. While fraud involving cryptocurrency was not even discussed in the 2020 report, it now accounts for 8% of fraud cases.
Asset misappropriation occurs when those entrusted to hold and manage the assets of a business physically steal the asset or abuse the benefits of the asset for their own personal gain. Considering asset misappropriation is the overwhelming favorite route for the typical occupational fraudster, it is important to better understand some of the more common schemes that fraudsters may try to employ on your business and the related impact. As seen in the chart below, the largest and most common occupational fraud schemes include excessive billing, theft of non-cash items, and exaggerated or non-business-related expense reimbursements.
Based on the ACFE survey, we’ve noticed that although asset misappropriation occurs at a much higher rate than corruption or financial statement fraud, that does not necessarily mean that it will have the largest monetary effect on the business. The survey indicates that the median loss due to asset misappropriation is $100,000.
Financial statement fraud is the deliberate misstatement or omission of company financial statement data with the intent of misleading the reader to believe the company is in a better financial position than it truly is. These instances tend to be much larger in terms of dollar amounts and much more complex in execution in comparison with those of corruption and asset misappropriation. Generally, with asset misappropriation and corruption, the fraudster prefers that the amounts be smaller so as not to raise any eyebrows. However, with financial statement fraud, the fraudster would need to grossly exaggerate the numbers to convince the reader that the company is financially sound and prosperous. For example, a $2,000 decrease in office expenses isn’t going to have the same impact on the reader of the financial statements versus a $500,000 increase in revenue. The survey indicates that the median loss in financial statement fraud schemes is $593,000.
The survey also indicates that the three broad categories of fraud can overlap and work together in any given circumstance. Fraudsters often will not limit themselves to using just one category of fraud schemes. If the opportunity presents itself and they believe they will not be discovered, they will take advantage of utilizing the different categories of fraud schemes. In other cases, to successfully conceal their fraudulent activity, it may be necessary for fraudsters to employ several layers of fraud to cover their tracks. As a result, fraudsters will attempt to conceal their wrongdoing in various ways. The most popular concealment schemes include creating fictitious documents or altering original physical documents, followed by the creation of fraudulent entries or alteration of original entry transactions in an organization’s accounting system.
Below are the top types of schemes used by occupational fraudsters in various industries based on the 2022 ACFE survey.
What are the Most Common Occupational Fraud Schemes in Various Industries?
According to the survey, the average median loss of financial statement fraud ($593,000) accounts for approximately four times the monetary loss of corruption ($150,000) and six times as much as asset misappropriation ($100,000), respectively. The instances of financial statement fraud tend to occur less frequently and, generally, it takes longer to uncover them. However, all the fraud schemes noted here can have a significant impact on business in terms of financial losses.
With the rise of blockchain technology comes a new scheme in the fraud world. Organizations are increasingly using cryptocurrency in their operations, providing fraudsters another means to commit their scams. While only 8% of frauds in the 2022 ACFE study involved cryptocurrency, this has increased since the 2020 study, and evidence suggests it will continue to increase at greater rates in the coming years. The most common cryptocurrency frauds involved making bribery or kickback payments in cryptocurrency (48%) or converting misappropriates assets into cryptocurrency (43%).
Another new topic in this year’s ACFE report centered around the COVID-19 pandemic. The ACFE compared five HR-related issued involving a fraudster in this survey to the last survey to examine if job uncertainty during the pandemic contributed to fraud. There was an increase from 2% to 4% from respondents for fear of job loss, denial of raise or promotion, cut in benefits, cut in pay and involuntary cut in hours. Respondents also noted that pandemic-related organizational staffing changes and a shift to remote work were the most commonly cited factors of pandemic-related issues contributing to fraud.
Regardless of the fraud scheme’s origin or category, the key to combatting occupational fraud is to prevent it from ever happening. If it cannot be prevented, then find it, and find it fast. The ACFE survey shows that if a scheme is uncovered early, the dollar amount of losses is nominal in comparison. However, if the fraud continues after two years, it generally becomes harder to uncover, and the monetary losses begin to increase exponentially.
The ACFE chart below indicates the financial impact of the various fraud categories based on detection method and length of time until uncovered:
How Does Detection Method Relate to Fraud Loss and Duration?
Occupational fraud continues to be a serious threat facing many business organizations. It can have a significant impact on business profits, cash flow and organizational reputation. Therefore, it is vital for organizations to use preemptive planning to minimize organizational risk. This includes reviewing and testing current control systems as well as designing a plan of action to deal with a control breach and the related uncovering of an occupational fraud scheme. Through proper planning and control testing, organizations can both minimize their fraud risk and adapt their controls to an ever-changing fraud environment. As fraudsters’ schemes evolve with technological advances—such as blockchain or other external issues, like a worldwide pandemic—organizations must be ready to adapt to these changes and keep their controls and procedures up to date—keeping one or two steps ahead of the bad actors. The best defense to minimizing your risk to occupational fraud is being proactive rather than reactive.