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Employee fraud: Our takeaways from the ACFE Report to the Nations

Jan 22, 2021

The Association of Certified Fraud Examiners (ACFE) recently issued its biennial Report to the Nations on occupational or employee fraud, which examines fraud committed by individuals against their employers. According to the ACFE, it’s one of the costliest forms of financial crime. There are more than 3.3 billion people in the global workforce, and ACFE says nearly all of them have access to or control over some portion of their employer’s cash or assets.  

The most recent Report to the Nations analyzed over 2,500 cases of occupational fraud that were investigated between January 2018 and September 2019. The report forms one of the most comprehensive global summaries of the costs, methods, victims and perpetrators of occupational fraud. 

According to the latest report, some fraud trends have been constant:

  • Organizations continue to lose about 5% of revenue to fraud each year
  • Asset misappropriation is the most commonly identified scheme
  • Tips are the best method of detection
  • The longer fraud goes unchecked, the higher the median loss

With these findings from the ACFE, we can build better defenses against occupational financial crime. Of note:

Inverse relationships

The statistics frequently point to inverse relationships. For example, asset misappropriation accounted for a significantly higher percentage of financial crime than financial misstatement fraud (86% compared to 10%, respectively). However, per case, the median loss in financial statement fraud was about 10 times higher. 

Likewise, small business and nonprofit organizations have fewer antifraud controls, which made them more susceptible to fraud, but their median losses were lower than those in large organizations. Fraud was committed by lower-level employees twice as often as upper-level executives, but executive-level fraud was nearly four times as costly ($60,000 average loss, compared to $230,000). 

Individuals with high authority levels committed the lowest percentage of fraud. But, losses generated by an owner or executive-level employee were 10 times higher than losses caused by non-manager-level employees ($600,000 compared to $60,000).

The “average fraudster”

According to the ACFE, perpetrators in the U.S. are predominantly male, between the ages of 31 and 45, have a university degree, and have been with their company between one and five years. Forty percent of the fraudsters worked in operations, accounting or sales departments. 

The older the fraudster, the larger the median loss. The median loss for employees under 40 was $75,000, while the median loss for those over 55 was $425,000.

Employees in their first year with a company are least likely to commit fraud; they accounted for only 9% of reported cases and caused a median loss of $50,000. Almost half of the reported cases (46%) were committed by employees who had been with their company between one and five years. Employees within that tenure range had a median loss of $100,000. The size of loss trended upward alongside an employee’s tenure; the most tenured group of employees caused a median loss of $200,000.

The weakest link

A lack of internal controls was the predominant weakness that contributed to fraud. Poor internal controls was cited in nearly a third of reported cases (32%), followed by overrides of existing internal controls (18%) and a lack of management review (18%).

Recovery

Without proper insurance coverage, the reality of any financial recovery is grim. In the U.S., 55 % of companies that were affected by fraud recovered nothing, and only 30% received partial recovery. 

What’s coming?

The data that informed this report was collected and analyzed before COVID-19, the subsequent economic downturn and the disbursement of relief funds. Before the pandemic, occupational fraud trends were decreasing overall. Don’t expect the same sunny news in the 2022 analysis. 

In the next report, we expect to see significant growth in occupational fraud. Companies needed to adjust internal controls for remote-work situations and quickly accommodate new financial relief programs like the Paycheck Protection Program in the U.S. Across the globe, many employees are facing financial struggles, too.

These economic and social pressures will influence occupational fraud (based on the universally recognized fraud triangle where opportunity, perceived pressure and rationalization lead to fraud). Organizations are powerless when it comes to rationalization and pressure, since those are primarily dictated by employees’ personal experiences, morals, objectives and attitudes, but they can reduce the opportunity for fraud to occur. 

What you can do to prevent occupational fraud

As long as people have access to assets, there will always be some level or risk. Given this reality, organizations must examine the conditions that perpetuate fraud and take steps to limit the opportunities. 

Before fraud occurs, organizations can: 

  • Build strong internal controls: Opportunity is best reduced through internal fraud controls, which are procedures designed to safeguard assets, avoid fraud and detect errors. Common internal controls are segregation of duties, management reviews, monthly reconciliations, three-way invoice matching and other controls on inventory, checks and cash.

  • Test internal controls: Too often, leaders believe an annual audit is sufficient to reduce the risk of fraud. Unfortunately, it’s not — nor is it the intended purpose. Audits are designed to independently verify the accuracy of financial statements, not to detect or prevent fraud. In most cases, the sampling method used in audits is not an effective technique to detect fraud. Instead, organizations need to monitor their internal controls, conduct fraud risk assessments and complete fraud-prevention checkups — preferably before fraud occurs. 

  • Ask for help: Whether you suspect fraud is occurring or not, a forensic examination can help you reduce your risk of fraud. Certified fraud examiners can apply their experiences and expertise to help you assess your fraud risk and tighten internal controls. Strategies to reduce fraud are far cheaper than the costs of experiencing, investigating and recovering from financial crime.

Related content:

Combat rising fraud with strong internal controls

Fraud and cybercrimes exploding during COVID-19

Employee fraud: What you need to know

Financial fraud: What to do when an employee steals from you

Author(s)

Dru D. Carney, CFE
Consultant I
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