Two Industry Reports on Fraud are Cause for Concern
(Editor’s Note: this article by Firestorm Expert Council Member Jack Healey is an excerpt from his paper “Analysis of ACFE Report to the Nation on Occupational Fraud in Conjunction with Verizon’s Data Breach Investigations Report Tells a Disturbing Story“)
In the past four weeks, two major fraud reports have been issued which should cause us to be more concerned about susceptibility to fraud in our business and personal lives. The Association of Fraud Examiners issued their bi-annual report to the Nations on Occupational Fraud and Abuse which is the 2014 Global Fraud Study; and Verizon issued their 2014 Data Breach Investigations Report (DBIR), which is a comprehensive analysis of the data breaches which occurred in 2013.
When read independently, these two reports are cause for concern. When read together, however, they tell a story; “Whether you are a large or small organization, your risks of fraud are increasing.”
The ACFE report is the largest data collection of occupational fraud worldwide. As in previous years the report supports the notion that 5 percent of the Gross World Product is lost to fraud each year. That amounts to $3.7 trillion!
Here are some ‘lowlights’:
- The median loss caused by the frauds of the ACFE study was $145,000. Additionally, 22 percent of the cases involved losses of at least $1 million.
- The median duration — the amount of time from when the fraud commenced until it was detected — for the fraud cases reported to us was 18 months.
- Approximately 77 percent of the frauds were committed by individuals working in one of seven departments: accounting, operations, sales, executive/upper management, customer service, purchasing and finance.
- Occupational frauds can be classified into three primary categories: asset misappropriations, corruption and financial statement fraud. Of these, asset misappropriations are the most common, occurring in 85 percent of the cases in the ACFE study. These frauds are the least costly, causing a median loss of $130,000. In contrast, only nine percent of cases involved financial statement fraud, but those cases had the greatest financial impact, with a median loss of $1 million. Corruption schemes fell in the middle in terms of both frequency (37 percent of cases) and median loss ($200,000), but run the longest in duration.
- Approximately, 30 percent of the schemes included two or more of the three primary forms of occupational fraud.
- The banking and financial services, government and public administration and manufacturing industries continue to have the greatest number of cases reported in our research. The mining, real estate and oil and gas industries had the largest reported median losses.
- The smallest organizations tend to suffer disproportionately large losses due to occupational fraud. Additionally, the specific fraud risks faced by small businesses differ from those faced by larger organizations, with certain categories of fraud being much more prominent at small entities than at their larger counterparts.
- Collusion helps employees evade independent checks and other anti-fraud controls, enabling them to steal larger amounts. The median loss in a fraud committed by a single person was $80,000, but as the number of perpetrators increased, losses rose dramatically. In cases with two perpetrators, the median loss was $200,000, for three perpetrators it was $355,000 and when four or more perpetrators were involved, the median loss exceeded $500,000.
- It takes time and effort to recover the money stolen by perpetrators and many organizations are never able to fully do so. At the time of our survey, 58 percent of the victim organizations had not recovered any of their losses due to fraud and only 14 percent had made a full recovery.
It is clear from the ACFE’s report that occupational fraud is still a threat to businesses and has a disproportionate impact on smaller companies.
Before we discuss how to ‘Predict and Plan’ for these frauds, we’re going to take a deeper dive into Verizon’s Data Breach Investigations Report in my full paper. Download my full analysis here.