[responsivevoice_button buttontext=”Listen to Post”]
The Association of Certified Fraud Examiners (“ACFE”) 2022 Report to the Nations estimates that the average organization loses 5% of its annual revenue to fraud each year, causing a median loss of $117,000 before being detected. Occupational fraud committed by individuals against their employers is not an emerging concept but it is clear that the pandemic has created new opportunities for fraudsters. Organizations must understand how fraud is committed within their industry, develop effective tools for timely detection, and have a plan to respond when occupational fraud has been detected.
The ACFE recently published its 2022 Report to the Nations which has the results of a comprehensive study of 2,110 cases across 133 countries. The study gathered data regarding occupational fraud cases that companies investigated around the world from January 2020 through September 2021, with a focus on the methods used to commit the fraudulent acts, how the illicit acts were detected, the characteristics of the fraud perpetrators and the overall impact the fraud had on the company.
Fraud is defined as a wrongful or intentional criminal act for financial or personal gain. Occupational fraud involves using one’s position to commit intentional wrongdoing against one’s employer. Occupational fraud can be categorized into one of three buckets :
- Asset Misappropriation – stealing or misusing company assets. Accounted for 86% of cases studied, but the least costly to organizations, with an average loss of $100,000 per case.
- Corruption – using one’s position of power for personal gain, including bribery, conflicts of interest and extortion. The second most common at 50% of cases studied, with an average loss of approximately $150,000.
- Financial Statement Fraud – intentional material misstatement in the financial statements. The least common fraud, at only 9% of cases studied, but the costliest, with an average loss of $593,000 per case.
As times change and technology evolves, so do fraudsters and their schemes. It is important to keep in mind that fraudsters do not necessarily limit themselves to one method of defrauding their organization, and many times companies will find that perpetrators of fraud have participated in many types of schemes all at once.
How Is Fraud Committed and by Whom?
For a fraudulent act to occur, there are usually three factors present: Opportunity, Pressure and Rationalization, also known as the Fraud Triangle. The opportunity to commit fraud typically results from internal control failures, such as the lack of segregation of duties that allows the perpetrator to commit and conceal the fraud at the same time. Pressures to commit fraudulent acts often stem from financial hardships. Lastly, rationalization allows a perpetrator to convince himself or herself that what they did was okay. For instance, the fraudster could rationalize that they deserve the additional monies because they are overworked and underpaid. Organizations need to be aware that fraudulent acts can be conducted by employees of all levels, in all departments, but fraud schemes carried out by those charged with governance, including managers, executives and the Board of Directors tend to last the longest and cost the most.  Executives only committed 23% of the cases studied, but the median loss of these cases was $337,000, significantly greater than losses caused by managers. 
After committing a fraud scheme, the fraudster’s next task is to conceal their actions for as long as possible. This means that the fraudster must create ways for their acts to go undetected, as the normal course of business continues. The top concealment methods used by fraudsters studied included :
- Creation of fraudulent physical documents (39% of cases)
- Alteration of physical documents (32% of cases)
- Creation of fraudulent electronic documents (28% of cases)
Those with the ability to create and edit financial records have an opportunity to commit and conceal fraudulent acts, which speaks to the importance of segregation of duties along with effective fraud detection methods.
Occupational fraud schemes last on average between 12-18 months prior to detection. How quickly a fraud scheme is detected, has a significant impact on the overall impact of the scheme.
There are many types of detection tools, with the most common being tips (42% of cases), internal audits (16%) and management review (12%).  Tips via hotlines continue to be an important anti-fraud mechanism and contribute to the quicker detection of fraudulent acts.
Perpetrators can cause their own downfall, as behavioral red flags are one of the most prominent indicators of fraud. Employees that are living beyond their means or buying lavish gifts for friends and family members without a known change in their finances, should be cause for concern. Eighty-five percent of fraudsters displayed at least one behavioral red flag which included, but are not limited to:
- Living beyond ones means (39% of cases)
- Financial difficulties (25% of cases)
- Unusually close association with vendor/customer (20% of cases)
Paying attention to employees’ behavioral red flags can be helpful in finding fraud acts quicker and, thereby, minimizing losses.
Impacts of Fraud and Withum’s Expertise in Fraud Prevention and Detection
If your organization has been the victim of an occupational fraud scheme or wants to proactively combat the potential for fraud schemes, Withum is experienced in all facets of fraud prevention and investigation, and our Forensic, Investigations and White-Collar Criminal Defense professionals are ready to assist. In addition to being Certified Public Accountants (CPA), Withum’s Forensics, Investigations, and White-Collar Criminal Defense team has years of investigative experience and includes former Federal Bureau of Investigation (FBI) and U.S. Secret service agents, Certified Fraud Examiners (CFE), Certified in Financial Forensics (CFF) and Certified Anti-Money Laundering Specialists (CAMS). Our respective teams have specialized experience in:
- Forensic analysis and investigation
- Internal corporate investigations
- Whistle-blower allegations
- Procurement fraud
- Money laundering
- Financial statement manipulation
- Any other type of occupational fraud
- White-collar criminal defense investigations
- Internal corporate investigations
- Digital forensics and eDiscovery
- Estate and trust investigations
- Background investigations and lifestyle analyses
- Internal control assessments and gap identification/improvements
- Risk assessments
- Vendor due diligence and background investigations
- Employee due diligence and background investigations
- Proactive transaction testing in high-risk areas/geography
- Fraud awareness trainings
- Data analytics
- Economic loss calculations
- Pandemic-related fraud matters
- Providing testimony at trial and/or sentencing
Contact any member of Withum’s Forensics, Investigations and White-Collar Criminal Defense Team with any concerns or questions.