Just how much should you worry about fraud in your business?
You should probably be scared. You should be very, very scared!
Because fraud really sucks. Especially if you are a smaller business.
The ACFE’s Report to the Nations released its ninth edition recently, marking 20 years of shedding even more light on how fraud affects business.
To make this short and sweet, because most of us have shorter attention spans on Fridays (myself included), the following are a few quick, yet powerful, points on the 2016 findings of the report:
- The most common detection method in the study was tips (39.1% of cases). Organizations with reporting hotlines were much more likely to detect fraud through tips than organizations without hotlines (47.3% compared to 28.2%, respectively)
- In cases detected by tips at organizations with formal fraud reporting mechanisms, phone hotlines were the most commonly used method (39.5%). But tips submitted via email (34.1%) and web-based or online forms (23.5%) combined to make reporting more common through the Internet than by telephone
- Whistleblowers were most likely to report fraud to their direct supervisors (20.6% of cases) or company executives (18%)
- The median loss suffered by small organizations – fewer than 100 employees – was the same as that incurred by the largest organizations – with more than 10,000 employees. So of course this type of loss can wreak havoc on smaller organizations!
- Organizations of different sizes tend to have different fraud risks. Corruption was more prevalent in larger organizations, and check tampering, skimming, payroll, and cash larceny schemes were twice as common in small organizations compared to larger organizations
- 81.1% of organizations had a code of conduct in place at the time the fraud occurred… we’ll talk about communication of codes in just a bit because this point is a little shocking!
- Small organizations had a significantly lower implementation rate of anti-fraud controls than large organizations. This lagging of fraud prevention and detection leaves small organizations extremely susceptible to frauds that can cause significant damage to their limited resources
- The presence of anti-fraud controls was correlated with both lower fraud losses and quicker detection. Comparison of organizations that had specific anti-fraud controls in place with organizations lacking anti-fraud controls, found that where controls were in place in organizations, fraud losses were 14.3%–54% lower and detected 33.3%–50% more quickly
- The most prominent organizational weakness that contributed to the frauds in the study was a lack of internal controls, which was cited in 29.3% of cases, followed by an override of existing internal controls, which contributed to just over 20% of cases
- More occupational frauds originated in the accounting department (16.6%) than in any other business unit. Of the frauds analyzed, more than three-fourths were committed by individuals working in seven key departments. The people who may be committing fraud in your organization work in – accounting, operations, sales, executive/upper management, customer service, purchasing, and finance
- The more individuals involved in an occupational fraud scheme, the higher losses tended to be. The median loss caused by one person was $85,000. When two people conspired, the median loss was $150,000; three conspirators caused $220,000 in losses; four caused $294,000; and for schemes with five or more perpetrators, the median loss was $633,000
- Fraud perpetrators displayed behavioral warning signs when they were engaged in their crimes. The most common red flags were living beyond their means, financial difficulties, unusually close association with a vendor or customer, excessive control issues, a general “wheeler-dealer” attitude involving unscrupulous behavior, and recent divorce or family problems. At least one of these red flags was exhibited during the fraud in 78.9% of cases
- Most occupational fraudsters are first-time offenders. Only 5.2% of perpetrators in the study had previously been convicted of a fraud-related offense, and only 8.3% had previously been fired by an employer for fraud related conduct
About those organizations (81.1%) that had a code of conduct in place at the time the fraud occurred, this point just proves how extremely important it is that employees know about the code of conduct. It’s not supposed to be some form of decoration sitting on a shelf. It actually matters to the organization.
Perhaps the fraud perpetrators didn’t know the code existed, or didn’t know the contents of the code in order to understand the seriousness of their actions. Perhaps the codes in some of these organizations were so riddled with holes and inconsistencies they resembled Swiss Cheese.
Perhaps some of these organizations didn’t have a section in their code stating how employees could report on suspected misconduct. Perhaps these organizations didn’t have a mechanism in place at all.
Whatever the case, the Report clearly shows that organizations with reporting mechanisms in place, like hotlines, or web-based reporting, found fraud faster and could halt it in its tracks sooner.
After 20 years of surveying organizations on fraud, and nine Reports outlining fraud around the world, it is clear that it’s time more organizations embraced simple set-up and easy to use ethics reporting platforms.
[source]ACFE 2016 Report to the Nations[/source]