Preventing and Detecting Occupational Fraud

Reprinted with permission of the New Jersey Society of CPAs, njcpa.org

Occupational fraud represents a significant risk to every organization, regardless of size or industry.

The Association of Certified Fraud Examiners (ACFE) defines occupational fraud as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” The ACFE estimates that organizations lose 5% of their revenue each year to occupational fraud. While 5% may not seem like a significant amount, when this percentage is projected against the Gross World Product (GWP), it totals more than $5 trillion lost due to fraud globally.

The ACFE Occupational Fraud 2024: Report to the Nations (legacy.acfe.com/report-to-the-nations/2024/) is the largest global study on occupational fraud. This year’s report is based on 1,921 real cases and spans 138 countries and territories. It explores the costs, schemes, victims and perpetrators of fraud.

The ACFE’s methodology for this report is based on the ACFE 2023 Global Fraud Survey, an online survey of Certified Fraud Examiners conducted from July to September 2023. Respondents provided information on the largest occupational fraud case they had investigated, with criteria requiring that the case involved occupational fraud, the investigation occurred between January 2022 and the survey period, the investigation was completed by the time of survey participation, and the perpetrator(s) had been identified with reasonable certainty.

Highlights from the Report

Of the 1,921 cases included in the survey, there were more than $3.1 billion in losses. In addition, 22% of cases had losses of more than $1 million.

The most common form of occupational fraud is asset misappropriation, or the theft of an employing organization’s assets, being present in 89% of fraud cases. Common examples of asset misappropriation from the report were cash larceny, skimming, billing schemes, payroll schemes and expense reimbursement schemes.

Despite asset misappropriation being the most common form of occupational fraud, it is also the least impactful to organizations, with an average median loss of $120,000. On the other hand, financial statement fraud was only present in 5% of cases. However, it is deeply impactful, causing a median loss of $766,000. There are plenty of examples of financial statement fraud, which includes revenue recognition fraud, expense fraud and fraudulent financial reporting to deceive investors, creditors or regulators.

In addition, corruption was present in roughly half of all cases, resulting in a median

loss of $200,000. Examples of corruption include conflicts of interest, bribery, illegal gratuities and economic extortion.

Red Flags of Fraud

According to the ACFE report, in approximately 84% of cases, red flags were present. Knowing these red flags can help organizations gain an advantage in detecting fraud.

Of the 1,921 cases included in this report, 75% of fraudsters displayed at least one of the eight most common behavioral red flags. The most common behavioral red flag since the ACFE’s first report in 2008 was the fraudster living beyond their means. Other red flags include:

The perpetrator is experiencing financial difficulties
Unusually close association with vendor/customer
Control issues, unwillingness to share duties
Irritability, suspiciousness or defensiveness
“Wheeler-dealer” attitude
Bullying or intimidation

Divorce/family problems

In addition to behavioral red flags, there are some organizational red flags to keep in mind, such as a lack of ethical tone at the top, a lack of documented policies and procedures, low employee morale and high employee turnover.

Profile of the Fraudster

Interestingly, there is no psychological profile of a fraudster. However, the data from the 2024 report does show that there are commonalities among perpetrators. Most perpetrators (87%) are first-time offenders and lack previous criminal history. Perpetrators are usually male (74%), have a university degree (52%) and are between the ages of 36 and 50 years old (53%).

There are also positive correlations between the age and tenure of the perpetrator and the losses they are capable of inflicting. For instance, perpetrators who have been working for their organization longer cause higher losses when committing fraud than their less-tenured counterparts. According to the report, employees working at their organization for one year or less had a median loss of $50,000. In contrast, perpetrators with 10 or more years of experience had a median loss of $250,000.

Lastly, more than half of all fraud cases studied in the report came from the same five departments at organizations: operations, accounting, sales, customer service and executive/upper management.

Internal Controls to Help Prevent Fraud

According to the ACFE report, the presence of anti-fraud controls is associated with lower fraud losses and quicker fraud detection. In addition, more than half of cases occurred due to a lack of internal controls (32%) and an override of existing controls (19%). This data shows that nearly half of the frauds in the study could have been prevented with a stronger system of anti-fraud controls.

The report outlines 18 anti-fraud controls commonly found in organizations, such as the presence of a code of conduct, management review, fraud training for employees and job rotations/mandatory vacation. The presence of these controls was associated with anywhere from a 23% to 63% reduction in median losses and a 14% to 50% reduction in fraud duration if the controls were in place. In essence, all these controls were associated with both faster detection and lower losses. But, according to the data, there are four controls — surprise audits, financial statement audits, hotlines and proactive data analysis — that are associated with at least a 50% reduction in both fraud loss and duration.

The most common method by which fraud was detected in the report was tips, from both internal employees and outside parties, which account for a staggering 43% of fraud detections, more than three times as many as any other method. Although there are many ways these tips were given, the report does note that having a dedicated tip hotline made an organization nearly twice as likely to detect fraud via a tip than an organization without a hotline. The second most common method of detection is by internal audit (14%) and the third is by management review (13%).

The 2024 report contains valuable insight into the types of fraud schemes that are occurring, red flags to watch out for and the value of implementing strong internal controls at organizations. Another statistic showed that 82% of organizations modified their anti-fraud controls following the fraud, and 95% of the modifications were expected to be effective at preventing future frauds. This report shows that trying to limit the opportunities of employees to commit fraud through internal controls proves to be a worthwhile effort.

Jaclyn Veno, CPA, oversees the development of Level Training programs for Galasso Learning Solutions. She can be reached at jacyln@galassolearningsolutions.com.