ACFE 2016 Report to the Nations on Occupational Fraud and ... · ACFE 2016 Report to the Nations on Occupational Fraud and Abuse October 26, 2016 Allan Bachman, CFE Education Manager

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The Accounts Payable & Procure-To-Pay Conference & Expo is produced by:9/16/2016

ACFE 2016 Report to the

Nations on Occupational

Fraud and Abuse

October 26, 2016

Allan Bachman, CFE

Education Manager

Association of Certified Fraud Examiners

Fraud is Hidden

• By its very nature its difficult to measure fraud.

• Unlike other crimes, until it is discovered, there is no way to know.

• There is a “tip of the iceberg” potential to all of these statistics.

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Executive Summary

• Typical organization loses 5% of revenues as a result of fraud.

• Total losses by cases examined exceeded $6.3 billion.

– The average loss per case was $2.7 million

– Direct loss does not include indirect losses

• It cannot be determined what the actual global losses due to fraud actually are.

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How Occupational Fraud Is Committed

• Most frauds originated in the accounting department (16.6%).

• 75% of frauds were committed in one of these departments:

– Accounting, Operations, Sales, Customer Service, Purchasing, Finance, Executive/Upper Management

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Some Definitions

• Occupational fraud:

– personal enrichment through deliberate misuse or the organization’s resources or assets

• Asset misappropriation:

– Employee steels an organization’s resources

• Billing scheme:

– Fraudulent disbursement for fictitious good or services (i.e. shell company)

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Some Definitions

• Check tampering:

– Forging or altering a check or electronic payment

• Employee reimbursement:

– Employee makes a claim for fictitious or inflated business expense reimbursement

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How Occupational Fraud Is Committed

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How Occupational Fraud Is Committed

83.5%

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How Occupational Fraud Is Committed

$125,000

$975,000

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Asset Misappropriation Sub-Schemes

Duration of Fraud Schemes

• The longer a fraud went undiscovered, the greater the loss.

– Median duration 18 months.

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Duration of Fraud Schemes

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Duration of Fraud Schemes

24 Months

24 Months

24 Months

Concealment of Fraud Schemes

• In 94.5% of the cases investigated the perpetrator took some effort to conceal the fraud.

• Methods used include:

– Created fraudulent (physical and/or electronic) documents

– Altered (physical and/or electronic) documents

– Altered or created transactions in the accounting system

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Concealment of Fraud Schemes

52.9%

Initial Detection of Occupational Frauds

• Most common detection method was tips (39.1%)– Organizations with hotlines were more likely to

have fraud detected.

• Organizations with hotlines were more likely to get tips (47.3%) compared to those without (28.2%).

• Active detection reduced the median loss and duration more than passive detection.

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Initial Detection of Occupational Frauds

39.1%

16.5%

13.4%

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Source of Tips

51.5%

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Impact of Hotlines

47.3%

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Formal Reporting Mechanism Used by Whistleblower

39.5%

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Size of Organization

• Median loss ($150,000) by small organizations (less than 100 employees) was the same as largest organizations (more than 10,000).

– This type of loss has a greater impact on the smaller organization.

• Smaller organizations had less anti-fraud controls.

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Size of Organization

$150,000

$150,000

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Methods of Fraud in Small Businesses

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Anti-Fraud Controls at Victim Organizations

• External audits was the most commonly implemented anti-fraud control (82%).

• Small organizations had fewer anti-fraud controls implemented.

• The presence of anti-fraud controls correlates to both lower fraud losses and quicker detection.

• Lack of internal controls was the most prominent weakness (29.3%).

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Anti-Fraud Controls at Victim Organizations

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Anti-Fraud Controls at Small Businesses

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Trends in the Implementation of Anti-Fraud Controls

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Effectiveness of Controls

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Effectiveness of Controls

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Internal Control Weaknesses That Contributed to Fraud

29.3%

20.3%

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Internal Control Weaknesses That Contributed to Fraud

Behavioral Red Flags Displayed by Perpetrators

• Fraud perpetrators display behavioral warning signs.

• At least one of these “red flags” was exhibited in 78.9% of the cases.

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Behavioral Red Flags Displayed by Perpetrators

45.8%30.0%

20.1%

Action Taken Against Perpetrator

• Most occupational fraudsters are first time offenders.

• In 40.7% of the cases victim organization decided not to refer fraud cases to law enforcement.– Fear of bad publicity being most often cited

reason

• Criminal and/or civil prosecution accounts for the remaining cases.

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Criminal Prosecutions

59.3%

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Criminal Prosecutions

56.8% 19.6%

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Criminal Prosecutions

39.0%

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Civil Suits

23.1%

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Civil Suits

40.4%

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Recovery of Losses

58.1%

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Action Taken Against Perpetrator

64.1%

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In Closing…

• In its early stages fraud and stupidity look a lot alike.

• Fraud indicators can often be explained away by claiming “oh, that was a stupid mistake.”

• Further investigation of “stupid mistakes” is always warranted.

• Follow-up is also critical.

• If you see something, say something.

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Download Your own Copy

• Want a PDF of the entire report?

• Go to:

• http://www.acfe.com/rttn2016.aspx

– Click Resources then Downloads

• https://s3-us-west-2.amazonaws.com/acfepublic/2016-report-to-the-nations.pdf

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The Accounts Payable & Procure-To-Pay Conference & Expo is produced by: 459/16/2016

Allan Bachman, CFE

Education Manager

Association of Certified Fraud Examiners

Thank youContact Information

512-276-8158

ABachman@ACFE.com

LinkedIn: Allan Bachman, CFE