Every two years the Association of Certified Fraud Examiners (ACFE) issues a fraud report based on hundreds of actual fraud cases. The report provides great insights into how fraud occurs (the method), the persons stealing (the fraudster), and the damage (the amount of losses).
If you are an auditor (internal or external), then you need to be familiar with the findings in this report. Understanding how theft occurs will enable you to detect and prevent it in the future.
The median loss per case when owners or executives were involved was $850,000
Businesses with a 100 or fewer employees suffered a median loss per case of $200,000
Businesses with more than 100 employees suffered a median loss per case of $104,000
In 40% of the cases, tips were the initial detection method (53% of the tips came from employees of the organization; 32% of the tips came from vendors, customers, and competitors)
Fraud losses were 50% smaller for organizations with fraud hotlines
Only 4% of the fraudsters had a prior fraud conviction
Occupational fraud was committed in the following categories: (1) asset misappropriation (89%), (2) corruption (38%), and (3) financial statement fraud (10%) -- in some cases, the fraudster used multiple schemes
The median losses were (1) $114,ooo for asset misappropriation, (2) $250,000 for corruption, and (3) $800,000 for financial statement fraud
70% of corruption cases were committed by someone in a position of authority
82% of corruption cases were committed by males
50% of corruption cases were detected by a tip
Internal control weaknesses led to nearly half of the fraud
Small businesses typically have fewer anti-fraud controls than larger organizations, leaving them more vulnerable
Data monitoring/analysis and surprise audits were correlated with the largest reductions in fraud losses and duration (yet only 37% of victim organizations implemented these controls)
A majority of the victim organizations recovered nothing
Fraudsters that were with the company for more than five years stole an average of $200,000
Fraudsters that were with a company for less than five years stole an average of $100,000
The industries with the highest levels of fraud were (1) Banking and Financial, (2) Manufacturing, (3) Governments, and (4) Health Care
The departments with the highest level of fraud were (1) Accounting (14%), (2) Operations (14%), (3) Sales (12%), and (4) Executive/upper management (11%)
69% of frauds were commented by males with a median loss of $156,000 (the median loss from female thefts was $89,000)
61% of the fraud cases involved someone with a university degree or postgraduate degree
When one fraudster was involved, the median loss was $74,000
When two fraudsters were involved, the median loss was $150,000
When three or more fraudsters were involved, the median loss was $339,000
Living beyond their means was the primary behavioral red flag (41% of cases)
I have been a member of the Association of Certified Fraud Examiners since 2004. Why? Because I want to be a better auditor. And I have found that the ACFE has given me a much greater understanding of how fraud happens and how to prevent it. The organization has made me a much better auditor. Consider joining this organization. (You can join without becoming a Certified Fraud Examiner (CFE), though I recommend doing that as well. Learn more about becoming a CFE.) You'll be glad you did.
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About the Author
Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses.
He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events.
Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.