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The Fraud Just Keeps Happening (Gwen Moritz Commentary)

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The indispensable Association of Certified Fraud Examiners released its biennial Report to the Nations on occupational fraud and abuse last month, and it never fails to enlighten. Based on 1,921 real cases reported by members of the ACFE, the report estimates that organizations lose 5% of revenue to fraud every year — a figure that has remained stubbornly stable.

The ACFE divides occupational fraud into three primary categories: asset misappropriation, corruption and financial statement fraud. Asset misappropriation is by far the most common and comprises everything you would describe as embezzlement. That includes skimming, payroll schemes, fraudulent invoices, unapproved purchases, reimbursement fraud and any other way employees have devised to rip off the company. It was a factor in 89% of the cases studied and resulted in a median loss of $120,000.

Corruption is the category the ACFE uses for bribery, bid-rigging, extortion, kickbacks and the like. It was present in almost half of the cases, so there is obviously significant overlap with asset misappropriation. The median loss from corruption was $200,000.

Financial statement fraud is the least common, found in only 5% of cases. But it is by far the most costly, creating a median loss of $766,000. A perpetrator who can create a material misstatement or omission in an organization’s financial statements tends to be an executive, and, as past reports have also concluded, “schemes carried out by perpetrators at higher levels of authority caused larger losses and lasted longer.”

It may seem counterintuitive, but the experts tell us that long-term employees who have worked their way into positions of trust have to be monitored as well. “Most fraudsters were employees or managers, but frauds perpetrated by owners and executives were the costliest,” the report concluded. Fraudsters on the payroll for more than 10 years caused losses five times larger than those hired within the previous year, and “fraudsters over the age of 50 caused the highest median losses.”

Fraudsters also tend to be male, outnumbering female perpetrators almost 3 to 1 and causing median losses 58% higher than their female counterparts.

Regardless of the demographics of the fraudster, more than half of them took advantage of a lack of internal controls or overriding of existing controls. I hate to keep mentioning that rural Kansas bank CEO who embezzled $47 million to feed a cryptocurrency scam, but he made 10 massive wire transfers to a cryptocurrency platform in five weeks. His chief financial officer then waited a couple more weeks before finally following bank policy of filing a suspicious activity report. Controls don’t work if they are overridden.

Most companies have various filters in place to try to detect fraud, including internal and external audits, document reviews and even surveillance. And they do catch some fraud. But by far the most common way workplace fraud is detected is from a tip, typically by another employee but also by customers. Make sure your employees and customers have a way to report any suspicions.


Gwen Moritz is a contributing editor at Arkansas Business Publishing Group. Email her at gmoritz@abpg.com.
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