If you’re serious about tackling fraud, establishing an understanding of the global occupational fraud landscape is a good place to start. Our favorite resource is the Association of Certified Fraud Examiners (ACFE), issuers of our Certified Fraud Examiner (CFE) credential. Every other year, the ACFE publishes its “Report to the Nations”, its biannual study of “the costs and effects of occupational fraud.” Occupational fraud is the misuse of an organization’s resources by an individual within the organization for some personal benefit. Often, that benefit is the siphoning of funds or other assets out of the organization’s control and into the control of the perpetrator. Sometimes, the benefit is not lining one’s own pockets, but those of their friends or family. Fraud educator Kelly Richmond Pope writes about these so-called “Robin Hood” fraudsters in her book, “Fool Me Once”. Other times, like at mega-retailer Macy’s last year, the personal benefit is less clear, but it may be the individual’s attempt at preserving their own job, ensuring a raise or promotion, or simply making the entity look better on paper.
We encourage you to read the full report HERE. Meanwhile, we’ve provided a quick recap here:
- The practitioners surveyed believe organizations lose approximately 5% of their revenue each year to fraud.
- Of the three categories of fraud – asset misappropriation, corruption, and financial statement fraud – asset misappropriation schemes were the most common, and largely the subject of this white paper. Financial statement frauds were the least common, but most costly for organizations in terms of reputational damage and regulatory fines and sanctions. Corruption was present in almost half of the fraud cases reported, typically co-occurring with either of the other types of fraud.
- Lower-level employees commit fraud more often, while higher-level employees take more when they commit fraud.
- Similarly, mid-career employees – those typically aged 31 to 50 years old – commit fraud more frequently, but older employees take more on average when they commit fraud.
- Fraudsters tend to be college educated, and hold positions in operations, accounting, and sales.
While significantly more men than women were the perpetrators in the cases reported to the ACFE, there is a growing field of interest and research in what practitioners are calling “pink collar crime” – less sophisticated forms of embezzlement more often committed by women in administrative and supporting roles within an organization. Former federal agent Kelly Paxton dedicates her book “Embezzlement” to that topic if you are curious about learning more.
Perhaps the biggest misconception that exists in the public about occupational fraud is that an organization’s external financial statement auditor is responsible for detecting it. Only 52 of the 1,921 cases reported for the ACFE’s 2024 Report to the Nations were discovered through external audit – that’s less than 3%. Alarmed? You shouldn’t be. When a CFO, Controller, or other executive signs the engagement letter for their organization’s annual audit, the CPA firm generally disclaims any responsibility for finding fraud as a result of their procedures within the letter. Furthermore, when that same executive signs any management representation letter at the close of the audit, there’s usually a sentence in the letter that acknowledges management’s responsibility for designing and evaluating the effectiveness of controls. An auditor may ask certain questions related to ownership of fraud risks, and what kind of ongoing assessment happens, but only to the extent that they feel comfortable that the accuracy of the reported financials isn’t in question.
Stay Tuned
This is the second article in our “Leader’s Guide to Fraud Prevention” series, designed to provide ongoing guidance on simple, effective actions leadership can take to prevent fraud, waste, and abuse. Future articles will explore everything from emerging fraud trends to critical risk areas like cybersecurity, as well as entity-wide recommendations for strengthening controls. By making a few strategic improvements to your fraud prevention environment, your organization can build a stronger foundation for long-term financial success.
Missed the first article in this series? Check it out HERE.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
