Occupational fraud – fraud committed by individuals against the organizations that employ them – is among the costliest forms of financial crime in existence, according to the 2020 Report to the Nations produced by the Association of Certified Fraud Examiners (ACFE). ACFE conducts studies on the costs and effects of occupational fraud annually, and the results of the organization’s 11th and most recent study were published earlier this year.
The study examined organizations of all types, sizes and industries from around the world, and it contains an analysis of 2,504 cases of occupational fraud that were investigated between January 2018 and September 2019. These cases resulted in total losses of more than $3.6 billion, but they represent only a small portion of the frauds committed annually.
Proactively identifying potential fraudsters can be challenging, as the average profile shows diversity between genders, age groups, education and tenure.
- Males committed 72% of cases with a median loss of $150,000, while females committed only 28% of cases with a median loss of $85,000.
- People aged 45 and below committed 67% of the cases, but older fraudsters caused much larger losses.
- The median loss for those below age 40 was $75,000.
- Those over age 60 committed only 3% of cases, but these resulted in a whopping $575,000 median loss.
- 64% of fraudsters had a university degree or higher.
- Fraudsters who had been with their organizations at least 6 years caused twice the loss of less-tenured employees—$200,000 median loss compared to $100,000.
Here are some other features of perpetrators and the frauds they committed:
- 51% of the frauds in the study were committed by two or more people.
- The more perpetrators, the larger the losses – one perpetrator resulted in a $90,000 median loss while three or more resulted in a median loss of $350,000.
- 89% of perpetrators had no prior charges or convictions.
According to the study, 85% of all fraudsters displayed at least one “Behavioral Red Flag.” Some of these warning signs may include:
- Living beyond their means (ranked #1 in every study since 2008, 42%)
- Financial difficulties (26%)
- Unusually close association with vendors/customers (19%)
- Control issues, unwillingness to share duties (15%)
- Irritability, suspiciousness or defensiveness (13%)
- “Wheeler-dealer” attitude (13%)
- Divorce/family problems (12%)
Fraud in Nonprofits
The study also reported that nonprofits can be more susceptible to fraud due to having fewer resources available to help prevent and recover from a fraud loss. These organizations typically have less oversight and a lack of certain internal controls. The study included 191 cases from nonprofit organizations resulting in a median loss of $75,000 and an average loss of $639,000. Additional findings include:
- Executive/owner perpetrators were involved in 39% of cases with a median loss of $250,000.
- Managers/supervisors committed 35% of cases with a median loss of $95,000.
- Employees committed 23% of cases with a median loss of $21,000.
According to the study, the top three schemes used in nonprofit fraud cases are:
- Expense reimbursements
Additionally, the study identified the top concealment methods used by fraudsters (in all cases, not just nonprofits):
- 40% created fraudulent physical documents
- 36% altered physical documents
- 27% altered electronic documents or files
- 26% created fraudulent electronic documents or files
In these cases, nonprofits detected fraudulent activity via the following channels:
- Tip or complaint (50% of tips came from employees, and 22% from customers)
- Internal audit (17%)
- Management review (13%)
- By accident (7%)
- Examination of documents (6%)
Our team at SST Accountants & Consultants stands ready to assist your organization with fraud prevention and internal controls. Contact us today to plan a comprehensive review of your organization’s current situation and processes.