The typical business or other organization loses 5% of its revenues to fraud each year, with a median loss of $130,000. About one-fifth of fraud cases involve losses of $1 million or more. That’s according to the Association of Certified Fraud Examiners’ (ACFE’s) Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse. Updated every other year, this report provides valuable guidance to help prevent and detect fraud.

3 categories

The report recognizes three basic categories of occupational fraud:

  1. Asset misappropriation. This form of fraud occurred in 89% of cases studied in the ACFE report, although it resulted in the lowest median loss ($114,000).
  2. Financial statement fraud. Misstatement occurred in only 10% of cases but caused the greatest damage — a whopping median loss of $800,000.
  3. Corruption. This category includes bribery and conflicts of interest. It occurred in 38% of cases and produced a median loss of $250,000.

Fraud risks vary depending on an organization’s size. Corruption is more common in larger organizations. Conversely, asset misappropriation schemes involving check tampering, skimming, payroll and cash larceny are far more common in smaller organizations.

Detection methods

In the 2018 ACFE study, 40% of the frauds were detected from tips by employees, customers, vendors and other outside parties. Other detection methods include:

  • Internal audit (15% of the cases),
  • Management review (13%), and
  • Discovered by accident (7%).

Confidential hotlines are a particularly effective way to solicit fraud tips. Fraud losses are 50% lower for organizations with hotlines than for those without. Although telephone hotlines are the most common fraud reporting mechanism (42% of cases), email (26%) and Web-based forms (23%) are widely used, too.

Active detection methods — such as monitoring, IT controls, account reconciliation and internal audits — are also associated with lower median losses and fraud durations. Passive detection methods — such as notification by police or accidental discovery — generally are associated with higher losses and durations.

Antifraud controls

Antifraud controls, including external audits of financial statements, codes of conduct, internal audits, management certification of financial statements, and management reviews, also play an important role. Regardless of their effectiveness in detecting fraud, they’re highly effective in deterring fraud. For help implementing strong internal controls, contact us. We can also help if you suspect a fraud scheme is underway.

© 2018

Tony LaNasa, CPA/CFE