Highlights of ACFE’s 2012 report on occupational fraud

The Association of Certified Fraud Examiners (ACFE) recently released its Report to the Nations on Occupational Fraud and Abuse – 2012 Global Fraud Study. The ACFE states that the Report is based on data from 94 countries compiled from studies of 1,388 occupational fraud cases that occurred between January 2010 and December 2011, and were investigated by certified fraud examiners. The ACFE conducts global occupational fraud studies every two years. According to the Report, a typical organization loses 5% of its revenues to fraud each year, which translates to more than $3.5 trillion if applied to the estimated 2011 Gross World Product. As in its prior studies, the Report shows that the industries most commonly affected by occupational fraud are banking and financial services, government and public administration, and manufacturing. Small organizations suffered the largest median losses. The Report indicates that asset misappropriation continued to be the most frequently committed fraud, yet least costly, with a median loss of $120,000, while financial statement fraud remained the least frequent but the most costly, with a median loss of $1,000,000. Below are the Report’s findings about the fraud perpetrators:

  • Perpetrators with higher authority levels tend to cause much larger losses. The median loss among frauds committed by owner/executive was $573,000, by managers it was $180,000, and by employees, $60,000.
  • Vast majority (77%) of all frauds were committed by individuals working in one of six departments: accounting, operations, sales, executive/upper management, customer service or purchasing.
  • In 81% of cases, the fraudster displayed one or more behavioral red flags that are often associated with fraudulent conduct: living beyond means (36%), financial difficulties (27%), close association with vendors or customers (19%) and excessive control issues (18%).
  • Approximately 87% of the fraudsters had never been charged or convicted of a fraud-related crime, and 84% had never been punished or terminated for fraud-related conduct.

The Report further notes that the most frequent method of detection continued to be by tip, which occurred in 43.3% of the cases, followed by management review and then by internal audit detection. For entities with fraud hotlines, the likelihood that the fraud would be found by tip was 50.1% whereas for entities without a fraud hotline, that likelihood decreased to 35%, according to the Report. Overall, the median duration of a fraud before being discovered remained consistent with the ACFE’s 2010 study, at 18 months. Nearly half of victim organizations do not recover any losses suffered from a fraud.

The Report confirms that the nature and threat of occupational fraud is universal. Though its research noted some regional differences in the methods used to commit fraud – as well as organizational approaches to preventing and detecting it – many trends and characteristics are similar regardless of where the fraud occurred. The Report recommends that management should continually assess the organization’s specific risks and establish or revise compliance and fraud prevention programs accordingly.