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Survey Shows Occupational Fraud Costs Typical Organization 5% Annually


Survey Shows Occupational Fraud Costs Typical Organization 5 AnnuallyInternal Theft Universal Problem for Businesses

The Association of Certified Fraud Examiners (ACFE) recently released its annual study, Report to the Nations on Occupational Fraud and Abuse, revealing that the typical organization loses 5% of revenues each year to fraud. Moreover, the median loss caused by the frauds in the study was $145,000. Additionally, 22% of the cases in the study involved losses of at least $1 million. The 2014 edition of the Report is based on 1,483 cases of occupational fraud, as reported by the Certified Fraud Examiners (CFEs) who investigated them.

Occupational fraud can be classified into three primary categories: asset misappropriations, corruption and financial statement fraud. Of these, asset misappropriations are the most common, occurring in 85% of the cases in the study, as well as the least costly, causing a median loss of $130,000. In contrast, only 9% of cases involved financial statement fraud, according to the ACFE study, but those cases had the greatest financial impact, with a median loss of $1 million. Corruption schemes fell in the middle in terms of both frequency (37% of cases) and median loss ($200,000).

The banking and financial services, government and public administration, and manufacturing industries continue to have the greatest number of cases reported in our research, while the mining, real estate, and oil and gas industries had the largest reported median losses. Furthermore, the smallest organizations tend to suffer disproportionately large losses due to occupational fraud. Additionally, the specific fraud risks faced by small businesses differ from those faced by larger organizations, with certain categories of fraud being much more prominent at small entities than at their larger counterparts. For example, check tampering schemes occurred in 22% of small business cases, but only 7% of cases in larger organizations. In addition, payroll and cash larceny schemes were found to occur twice as often in small businesses as in larger businesses. Meanwhile, corruption remains a significant threat to larger organizations, occurring in nearly 40% of reported cases; in contrast, 33% of the incidents at small businesses involved corruption.

About 77% of the frauds in the study were committed by individuals working in one of seven departments: accounting, operations, sales, executive/upper management, customer service, purchasing and finance.  Moreover, not surprisingly, the higher the perpetrator’s level of authority, the greater fraud losses tend to be. Owners/executives only accounted for 19% of all cases, but they caused a median loss of $500,000. Employees, conversely, committed 42% of occupational frauds but only caused a median loss of $75,000. Managers ranked in the middle, committing 36% of frauds with a median loss of $130,000.

The study also found that 42% of frauds are detected by tips, which would make hotlines a critical role in and organizations’ anti-fraud programs. But the study shows that of the organizations victimized by fraud, only 54% had a hotline mechanism in place, and less than 11% provided rewards for whistleblowers. “These rates indicate that many organizations have room for improvement in encouraging the tips that so effectively help uncover fraudulent conduct,” cites the report. What’s more, of the controls put into place to detect fraud, such as code of conduct, an anti-fraud policy, management review procedures and anti-fraud training programs, proactive data monitoring and analysis appears to be the most effective at limiting the duration and cost of fraud schemes.

In terms of looking at those employees committing the crimes, the vast majority of occupational fraudsters are first-time offenders; only 5% had been convicted of a fraud-related offense prior to committing the crimes in the study. Furthermore, 82% of fraudsters had never previously been punished or terminated by an employer for fraud-related conduct. However, there are common red flags to look out for. When survey respondents were asked to identify which, if any, common behavioral indicators were exhibited by the perpetrators before their frauds were detected, at least one red flag was identified in 92% of cases, and, in 64% of cases, the fraudster displayed two or more behavioral red flags. For example, approximately 44% of fraud perpetrators were living beyond their means while the fraud was ongoing, and 33% were experiencing known financial difficulties. Other common red flags were an unusually close association with a vendor or customer (22%), displaying control issues or an unwillingness to share duties (21%), a general “wheeler-dealer” attitude involving shrewd or unscrupulous behavior (18%), and recent divorce or family problems (17%).

The ACFE study, performed each year since 1996, reflects the gravity of employee theft within organizations. Technological advancements have provided both enhanced tools and additional challenges for fraud perpetration and concealment. Not only do organizations need to enhance their internal security measures but they also must be vigilant in having the right insurance coverage in the form of Commercial Crime. Commercial Crime insurance typically provides several different types of coverage, such as: employee dishonesty coverage; forgery or alteration coverage; computer fraud coverage; funds transfer fraud coverage; money and securities coverage; and money orders and counterfeit money coverage.

Axis Insurance Services provides Commercial Crime insurance and we’d be happy to review the type of coverage that would be right for your business. Just give us a call at (877) 787-5258.

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Blogged on: June 6, 2014 by Mike Smith
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