The typical business or other organization loses five percent of its revenues to fraud each year, with a median loss of $130,000. And about one-fifth of fraud cases involve losses of $1 million or more. That is according to the Association of Certified Fraud Examiners’ (ACFE) Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse. Updated every other year, this report provides valuable guidance to help prevent and detect fraud.
Three categories
The report recognizes three basic categories of occupational fraud:
- Asset misappropriation. This form of fraud occurred in 89% of cases studied in the ACFE report, although it resulted in the lowest median loss ($114,000).
- Financial statement fraud. Misstatement occurred in only 10% of cases but caused the greatest damage — a whopping median loss of $800,000.
- Corruption. This category includes bribery and conflicts of interest. It occurred in 38% of cases and produced a median loss of $250,000.
Fraud risks vary depending on an organization’s size. Corruption is more common in larger organizations. Conversely, asset misappropriation schemes involving check tampering, skimming, payroll, and cash larceny are far more common in smaller organizations.
Detection methods
In the 2018 ACFE study, 40 percent of the frauds were detected from tips by employees, customers, vendors, and other outside parties. Other detection methods include:
- Internal audit (15% of the cases)
- Management review (13%)
- Discovered by accident (7%)
Confidential hotlines are a particularly effective way to solicit fraud tips. Fraud losses are 50 percent lower for organizations with hotlines than for those without. Although telephone hotlines are the most common fraud reporting mechanism (42% of cases), email (26%) and web-based forms (23%) are widely used, too.
Active detection methods — such as monitoring, information technology controls, account reconciliation, and internal audits — also are associated with lower median losses and fraud durations. Passive detection methods — such as notification by police or accidental discovery — generally are associated with higher losses and durations.
Antifraud controls
Antifraud controls, including external audits of financial statements, codes of conduct, internal audits, management certification of financial statements, and management reviews, also play an important role. Regardless of their effectiveness in detecting fraud, they are highly effective in deterring fraud. For help implementing strong internal controls, contact us. We also can help if you suspect a fraud scheme is underway.