Occupational Fraud Remains Well Entrenched Globally

Small businesses are particularly vulnerable, fraud examiners say

By Steve Bates May 14, 2012
Employees committing fraud typically are first-time offenders with clean employment histories, yet they usually display one or more behavioral red flags that could be used to detect and stop their crimes, according to a new report on global fraud.

Worldwide, organizations lose an estimated 5 percent of their annual revenues—possibly more than $3.5 trillion—to fraud each year, according to the Austin, Texas-based Association of Certified Fraud Examiners (ACFE). Their report is titled Report to the Nations on Occupational Fraud and Abuse.

Small businesses, many of which lack sophisticated systems to detect and thwart fraud, are particularly vulnerable to occupational fraud, which is defined as schemes in which an employee abuses the trust placed in him or her by an employer for personal gain. This is “a threat faced by all organizations worldwide,” said the report, a new version of which is issued every other year.

“As in previous years, what is perhaps the most striking about the data we gathered is how consistent the patterns of fraud are around the globe and over time,” wrote James D. Ratley, ACFE’s president and CEO, in the latest report.

Among highlights of the research:

  • Most occupational fraudsters are first-time offenders with clean employment histories. About 87 percent have never been charged with a fraud-related offense, and 84 percent have never been punished or terminated by an employer for fraud-related conduct.
  • In 81 percent of cases, the perpetrator displayed one or more behavioral red flags that often are associated with fraudulent conduct. Living beyond one’s means (36 percent of cases) and undergoing financial difficulties (27 percent of cases) were the most common.
  • The smallest organizations in the study suffered the largest median losses.
  • Fraudsters with high levels of authority tended to cause large losses. The median loss reported in fraud committed by business owners and executives was $573,000.
  • The longer a perpetrator works for an organization, the higher the fraud loss tends to be. Those with more than a decade of tenure caused a median loss of $229,000.

The report found that the banking and financial services industry was most commonly victimized. But government and manufacturers also were targeted frequently. More than three-fourths of reported fraud was committed by individuals working in six departments: accounting, operations, sales, executive/upper management, customer service and purchasing.


Asset misappropriation schemes were by far the most common type of fraud reported, but they were the least costly form, with a median loss of $120,000. Financial statement fraud made up just 8 percent of cases in the study but caused the greatest median loss at $1 million per incident.

The report noted that much fraud is not detected or reported, so the true numbers might never be known. “Because fraud inherently involves efforts at concealment, many fraud cases will never be detected, and of those that are, the full amount of losses might never be determined or reported,” the report stated. “Consequently, any attempt to quantify the extent of all occupational fraud losses will be, at best, an estimate.”

Tips led to more than 43 percent of the revelations of fraud incidents in the latest report, followed by management review and internal audit at about 14 percent each. Employees provided just over half of the tips, followed by customers at 22 percent and anonymous tipsters at 12 percent. “Not surprisingly,” the report noted, “organizations with some form of hotline in place saw a much higher likelihood that a fraud would be detected by a tip (51 percent) than organizations without such a hotline (35 percent).”

A lack of internal controls was found to be a major contributor to fraud. “Interestingly, a poor tone at the top [of the organization] contributed to 9 percent of all the fraud cases reported to us but was cited as the primary factor in 18 percent of cases that resulted in a loss of $1 million or more,” the report said. “That reinforces the importance of a proper ethical tone from management in protecting an organization against the largest frauds—those that have the greatest potential to cripple the organization’s finances and reputation.”

The report advised employers not to rely upon external audits as the organization’s primary fraud detection method. “They detected only 3 percent of the frauds reported to us, and they ranked poorly in limiting fraud losses,” the report added.

It recommended targeted fraud awareness training for employees and managers as a way to deter fraud.

Steve Bates is manager of online editorial content for SHRM. He can be reached at steve.bates@shrm.org.

Related Articles:

Fraud-Busting Linguistic Software Has Growing HR Applications, SHRM Online Technology Discipline, May 2012

Report Predicts Surge in Workplace Ethical Lapses, SHRM Online Ethics & Sustainability Discipline, January 2012

Report: Red Flags Overlooked in Most Corporate Fraud, SHRM Online Ethics & Sustainability Discipline, August 2011

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