The Impact of Occupational Fraud on Victim Organizations

The Impact of Occupational Fraud on Victim Organizations

Last week the Association of Certified Fraud Examiners ("ACFE") issued its 2016 Report to the Nations on Occupational Fraud and Abuse ("Global Fraud Study"). In the Global Fraud Study, the ACFE analyzed 2,410 cases reported by Certified Fraud Examiners from January 2014 through October 2015 covering 114 countries and over $6.3 billion in losses. The findings of the Global Fraud Study are concerning given the amount of resources spent annually by organizations to prevent fraud; it was estimated in 2014 that the total amount of fraud worldwide was up to $3.7 trillion.

What Organizations Are at Risk?

The simplest answer is that all organizations are at risk for fraud, but the banking and financial services industry is by far the most common victim, making up 16.8 percent of all victim organizations. This is nearly as large as the next two industries combined.

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So what is it about the banking and financial services industry that makes them so likely to become a victim of occupational fraud? The obvious answer would be access to money, but as you will see below, that is not necessarily the case.

How is Occupational Fraud Committed?

Fraud is often committed by perpetrators when the opportunity presents itself and is usually not limited to only one scheme. The most common type of occupational fraud is asset misappropriation, which includes cash larceny, false billing, and inflated expense schemes, occurring in a staggering 83.5 percent of all cases. Surprisingly, when we look more closely at the banking and financial services industry, corruption (bribery or conflict of interest) is far more likely to occur than any of the three primary asset misappropriation schemes individually and is almost equally as likely as all three combined.

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This would seem to be counterintuitive given the relatively easy access to money within this industry.

Why Does Occupational Fraud Occur?

Despite the continued focus on fraud over the last decade, the most likely reason occupational fraud is likely to still occur within victim organizations is lack of internal controls, weak internal controls or lack of management review.

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Nearly 30 percent of the occupation fraud committed is caused by the lack of internal controls, allowing perpetrators to commit their fraud schemes with very little to no resistance. It is equally frightening to learn that nearly 40 percent of occupational fraud is committed by either overriding existing internal controls or lack of management review, meaning that the fraud scheme would have been prevented if not for lax oversight and/or review by management and was easily preventable.

What Are the Risks?

According to the Global Fraud Study, victim organizations lost five percent of their annual revenue to fraud, with an average loss of $2.7 million. While this should be incentive enough for organizations to do everything they can to prevent fraud, victim organizations often face other potential problems in the form of a damaged reputation or fines from regulators. While only 8.4 percent of victim organizations faced fines, those fines often tended to be costly.

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In fact, 53 percent of the fines to victim organization were from $100k up to over $1 million.

How Can Organizations Reduce Their Risk of Occupational Fraud?

While there is no way to reduce the risk of occupational fraud completely, there are many steps that can be taken to greatly reduce these risks, including, but not limited to:

1. Perform fraud risk assessment;
2. If not already in place, institute internal controls;
3. If already in place, ensure internal controls are adequate;
4. Ensure management review/internal audits properly completed;
5. Establish proper tone at the top;
6. Provide employees anti-fraud training;
7. Increase "perception of detection" amongst employees;
8. Ensure effective fraud reporting mechanisms;
9. Thorough employee screening;
10. Create employee support programs.

 

Should you have concerns that fraud may be occurring within your organization or you need someone to review your current policies and procedures to make sure you are minimizing your risk, contact Geoff Winkler at Bates Group via email at gwinkler@batesgroup.com or telephone at (503) 670-7772.

More information about the Global Fraud Report can be found on the ACFE website.