Fast fraud facts: ‎News from Occupational Fraud 2022: A Report to the Nations

Did you know that organizations worldwide lose five percent of their revenue each year, for an estimated total of $4.7 trillion dollars, to occupational fraud on an annual basis? In the recently published 2022 version of the Occupational Fraud Report (the “Report”), the most comprehensive global study by The Association of Certified Fraud Examiners (“ACFE”) to date, the ACFE addresses the true cost of fraudulent schemes for organizations.

The Report explores how occupational fraud is typically committed and by whom, as well as how organizations can identify, detect, and prevent fraudulent schemes from occurring. In the context of the COVID-19 pandemic, with a shift towards remote work environments, digital payments, and tech-based structures, organizations were required to adapt and find innovative ways to address what is often a challenging topic to investigate and understand due to the level of subterfuge typically involved in fraudulent schemes.

The data that forms the foundational basis for the Report provides valuable information about the costs, methods, perpetrators, and outcomes associated with occupational fraud schemes, with information derived from 2,110 real cases which affected organizations in 133 countries and across 23 industries. The average loss per case in the data reviewed by the ACFE was USD$1,783.000, totalling more than USD$3.6 billion in losses caused by fraudulent conduct.

The Report provides valuable information for businesses to consider in allocating their anti-fraud approaches, resources, and efforts, as well as considerations for implementing preventative protocols and details for effective standards to increase the likelihood of detection.

Perpetrator priorities in schemes

Three primary categories of fraudulent schemes tended to be the most prevalent in the cases reviewed:

• Asset misappropriation, where employees steal or otherwise misuse an employer’s resources. These schemes are the most common, occurring in 86 percent of the cases reviewed, but are also the least costly, with an estimated USD$100,000 median loss;
• Financial statement fraud, where a perpetrator intentionally causes a material misstatement or omission in the organization’s financial statements. This type of fraud is less common than asset misappropriation, occurring in 9 percent of the cases reviewed, but is the most costly, with an estimated USD$593,000 median loss; and,
• Corruption schemes, which include conduct such as bribery, conflicts of interest, and extortion. These schemes occurred in 50 percent of the cases reviewed, and caused an estimated median loss of USD$150,000.

Mixing it up & covering it up

Notably, perpetrators do not always limit themselves to one type of scheme, often utilizing a variety of tactics; the ACFE notes that 40 percent of the cases involved more than one of the three categories of occupational fraud.

Fraudulent conduct costs

A typical fraud case causes a loss of approximately USD$8,300 per month, and lasts approximately 12 months before detection, although some schemes cause harm faster than others. Companies tend to catch certain schemes (e.g., corruption, register disbursements, etc.) more quickly than others (e.g., financial statement fraud, payment tampering, etc.), which often go on for over a year before being uncovered.

Trouble at the top

Not all schemes are operated equally. The involvement of three or more perpetrators can increase the pace at which the loss occurs. Additionally, schemes involving owners and/or executives move at a much greater pace than those that involve employees and/or managers.

What’s new?

The increased use of cryptocurrency in an ever-changing digital landscape has created new methods for old approaches, particularly when it comes to perpetrators who engage in bribery and kickback payments and conversion of misappropriated assets. The ACFE notes that approximately eight percent of all fraud cases now involve the use of cryptocurrency.

Themes for targets

Some organizations are more susceptible than others to fraudulent schemes, both in terms of occurrence rates and the size of loss, including:

• Organizations in the real estate, transportation and warehousing, construction, and utilities industries; and,
• National-level government entities, as well as local governments with smaller staffing.

While schemes which involve corruption and misappropriation of non-cash assets are more prevalent in larger organizations, skimming and payment tampering occur more frequently in smaller organizations.

To-do for detection

Detection is a detail that cannot be overlooked by organizations, both in terms of the timeliness of detection and for lowering the overall losses caused by fraudulent schemes.

The ACFE found that organizations that maintain fraud hotlines or other reporting mechanisms detect fraud more quickly and have lower losses than organizations without similar easily accessible reporting mechanisms. Almost half of all of the fraudulent schemes in the cases reviewed were detected from tips from employees, with the volume of reports being provided to an email or an online form both far exceeding those provided via telephone hotline tips.

An ounce of prevention

In addition to detecting fraud quickly, organizations can protect themselves against fraudulent schemes by implementing controls to make fraud more difficult to perpetrate. Prevention is particularly important in light of the fact that in more than half of all cases reviewed, the victim organization failed to recover any of the losses from the fraud.

The ACFE found that almost half of all frauds reviewed were preventable if improved anti-fraud controls had been in place, and occurred due to either a lack of internal controls, or by a perpetrator overriding or circumventing existing controls.

Steps for success

The unfortunate reality is that fraud happens to most businesses, whether it remains undetected or is brought to light through prevention and detection protocols and resources. Organizations should consider reviewing their fraud detection and prevention protocols on a regular basis, and consider whether the processes in place are continuing to effectively support the organization’s needs. 

This article provides only general information about legal issues and developments, and is not intended to provide specific legal advice. Please see our disclaimer for more details.