The Association of Certified Fraud Examiners (“ACFE”) recently published Occupational Fraud 2022: A Report to the Nations. This report summarizes fraud investigations that took place between January 2020 and September 2021. It spans 2000 separate cases of fraud, across 133 countries and in 23 separate industries. The report highlights many important trends that employers will want to pay attention to in the coming years. Below are three of the takeaways that we found most compelling.
AN ORGANIZATION’S EMPLOYEES ARE ITS BEST DEFENSE AGAINST FRAUD
42 percent of frauds measured in the ACFE report were detected by tips. This was than 3 times higher than the next most common method of detection, an internal audit. More than 50 percent of reports came from current employees. Given these numbers, employers will want to make sure that they have created a safe environment for employees to report suspected fraud. Part of that safe environment might include the creation of systems that employees can use to make a report. In 73 percent of all cases where a reporting mechanism was used to report fraud, an email or a web-based forum was the whistleblower’s option of choice. Perhaps not surprisingly, email and web-based reports moved past 2020’s preferred option – the telephone hotline.
SMALL ORGANIZATIONS BEWARE
Organizations of under 100 people employees to be particularly wary of fraud. Compared against organizations of: 100 to 999 employees; 1,000 to 9,999 employees; and 10,000 or more employees, the ACFE reported that the smallest organizations suffered the greatest median loss – $150,000. One possible reason for this data point is that the smallest organizations may have the least ability to implement robust internal fraud controls. Whatever the reason, the impact of such a loss likely hits the home the strongest at a smaller organization.
PREDICT THE FUTURE – LOOK AT POTENTIAL RED FLAGS
The ACFE report identified the most common behavioral “red flags” exhibited by perpetrators of fraud. 39 percent of the fraudsters measured by the report displayed signs that they were living beyond their means. (These employees often want to show off their “new found wealth.”) 25 percent of fraudsters seemed to be experiencing financial difficulties. 20 percent of fraudsters showed an “unusually close association with a vendor or customer.” Interestingly, the ACFE report seems to indicate that HR-related red flags were not necessarily predictive of fraud perpetration. Only 50 percent of fraud perpetrators experienced negative HR-related issues prior to or during their frauds. Examples of these types of red flags included fear of job loss, poor performance evaluations, and having been denied a raise of promotion.
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Despite an organization’s best efforts to predict the future and prevent fraud before it starts, sometimes a case of employee-related fraud is unavoidable. What an employer can control is its response. By hiring a qualified investigator, an organization may be able to identify the perpetrator, stop any ongoing losses, and sometimes recover what was stolen.