The 2014 Report to the Nations on Occupational Fraud and Abuse was recently released by the Association of Certified Fraud Examiners (ACFE), and the news is not good. The report estimates that the typical organization loses 5 percent of revenues each year to fraud, which translates to global fraud losses of nearly $3.7 trillion.
Total median losses for fraud cases in Canada came in at $250,000 — the second highest of all nine global regions included in the report. Eastern Europe and Western/Central Asia lead the pack, with median losses of $383,000.
Three Types of Fraud
Occupational fraud takes three primary forms: Asset misappropriation, corruption and financial statement fraud. Asset misappropriation, which includes fraudulent disbursements or theft of cash and inventory, is the most common type of fraud, accounting for 85 percent of fraud cases. However, it is the least costly type of fraud in terms of median losses.
Financial statement fraud, including overstatement and understatement of revenues, is the least common type of fraud, but the most costly, with median losses of $1 million.
Detection Methods and Controls
Some fraud detection methods are clearly better than others. Nearly 44 percent of frauds were discovered by tips in Canada, with employee tips being the most common. So it’s no surprise that the presence of a tip reporting hotline had a substantial impact on fraud detection, particularly in smaller businesses.
External audits, which are the most common method used for fraud detection, are unfortunately among the least useful, with only 3 percent of all fraud cases detected primarily via audit. This compares to 7 percent of fraud cases that are detected purely by accident.
In contrast, proactive data monitoring and analysis — present in only 36.7 percent of Canadian fraud cases — is the most effective control, reducing fraud losses by 60 percent and fraud longevity by 50 percent.
Note that the median duration for all types of fraud schemes is 18 months before detection. But the faster fraud is discovered, the less financial damage usually occurs.
More than half of fraudsters in Canada are employees, but fraud committed by owners and managers causes substantially more damage. It typically takes two years for owners to be caught, since they can more easily circumvent controls.
Best Practices for Reducing Fraud
The ACFE offers several recommendations for fraud reduction:
Use proactive detection. Fraud tip hotlines, management review procedures, internal audits and employee monitoring mechanisms work. Surprise audits, a dedicated fraud team, and formal fraud risk assessments are also powerful fraud reducers.
Create a no-fraud climate. Written anti-fraud policies, formal management review procedures and anti-fraud staff training are among the no- and low-cost steps recommended by the ACFE to reduce vulnerability to fraud.
Look for fraudulent behaviour. Most perpetrators work for their company for a long time before the fraud begins. Be aware of the red flags shown by many fraudsters, such as experiencing financial troubles, living beyond their means, and never taking vacations.
Remember, a zero tolerance approach to fraud starts at the top. Model good behaviour for your employees by implementing fraud prevention policies and controls and following them to the letter.
Let us help you reduce the likelihood of fraud in your business by assessing your internal controls and fraud detection tactics. Contact a DJB professional today for more information.