ACFE Publishes New Fraud Study

Every two years, the Association of Certified Fraud Examiners (ACFE) publishes a study detailing the costs, schemes, perpetrators and victims of occupational fraud. "Occupational Fraud 2024: A Report to the Nations" was recently released. It covers more than 1,900 cases of white-collar crime, occurring in 138 countries. Consistent with previous biennial studies, the 2024 report estimates that the typical organization loses 5% of its revenues each year to fraud.

The 5% benchmark is a conservative estimate of fraud losses because many frauds go undetected or unmeasured. Plus, some losses are indirect, including lost productivity, reputational damage and the related future loss of business. Many of these losses are never fully recovered.

Key Findings

To help assess fraud risks, business owners and managers should review the following statistics from the 2024 study.

Median losses. Globally, the median loss caused by the frauds in the 2024 study was $145,000. The median loss for organizations with fewer than 100 employees was $141,000, compared to $200,000 for those with more than 10,000 employees. Although the dollar amount per incident may be lower for small companies than for large ones, fraud losses as a percentage of annual revenue tend to be higher for smaller victim-organizations.

Industries. Certain industries tend to be more vulnerable to fraud than others. Industries that reported the most fraud cases in the latest study include:

• Banking and financial services (305 cases),
• Manufacturing (175 cases),
• Government and public administration (171 cases), and
• Health care (117 cases).

Industry fraud risks can also be gauged by how much was lost per incident. Sectors with the highest median losses per incident include mining ($550,000), wholesale trade ($361,000), manufacturing ($267,000) and construction ($250,000) companies.

Perpetrators. The biggest fraud losses were caused by dishonest owners and executives (median loss of $500,000). Significantly lower amounts were lost when fraud was committed by managers ($184,000) or employees ($60,000). Most perpetrators had no previous criminal record. But, before being caught, many white-collar criminals exhibited classic red flags, such as living beyond their means, experiencing personal financial difficulties, and having unusually close ties with vendors or customers.

Duration. The longer fraud schemes go undetected, the more financial losses they tend to cause. From start to finish, the median fraud scheme in the 2024 study took 12 months to uncover. The average loss per month was $9,900, up from $8,300 in the 2022 study.

Role of cryptocurrency. The 2024 study provides statistics on the role cryptocurrency plays in fraud. Although many people associate fraud with digital assets, the study found that only 4% of schemes involved cryptocurrency. Of those cases, crypto was most commonly used to convert stolen assets (47%) and make bribery and kickback payments (33%).

Types of schemes. The study identifies three basic types of frauds:

1. Asset misappropriation. This category represents 89% of cases in the 2024 study. It happens when the company's resources, such as cash or inventory, are stolen.
2. Corruption. Nearly half of the cases (48%) involved corruption, such as kickbacks, bribes and extortion.
3. Financial misstatement. These were the least common schemes (occurring in only 5% of cases). It happens when a dishonest employee—usually an executive, an upper-level manager, or an employee in the finance and accounting department—causes a material misstatement or omission in the financial statements. Examples include reporting fictitious revenue or concealing liabilities.

Median losses were lowest for asset misappropriation ($120,000) and highest for financial misstatement ($766,000). Many cases involved more than one type of fraud scheme. For example, 35% of the frauds in the 2024 study involved both asset misappropriation and corruption. Only 1% of the cases involved financial misstatement alone.  

Methods of Detection

The 2024 study reports that the top ways victim-organizations detect fraud schemes include:

• Tips (43%),
• Internal and external audit (17%), and
• Management review (13%).

Employees supplied more than half (52%) of the fraud tips in the study. Other common whistleblowers included customers (21%) and vendors (11%). Anonymous reports accounted for 15% of all tips.

Reporting mechanisms are essential to encourage tips from whistleblowers. Web-based (40%) and email (37%) reporting mechanisms are now more popular than telephone hotlines (30%). For the first time in the study's history, web-based mechanisms were the most popular method for reporting suspicious activity. By comparison, in 2020, the top three reporting mechanisms were used essentially equally (about one-third of tips came from each).

Fraud Prevention

Robust internal controls are the best defense against fraud. In terms of lowering fraud losses, the most effective internal controls in the 2024 study were:

Weak internal controls often provide dishonest people with opportunities to commit fraud. The 2024 study found that more than half of cases were correlated with lack of internal controls or management override of internal controls. Unfortunately, weak controls tend to be common among smaller organizations.

One way to strengthen your internal controls is to train executives, managers and other employees about reporting mechanisms, common schemes in a particular industry and the warning signs of fraud. The ACFE says that fraud training combined with a formal reporting mechanism dramatically increases the likelihood that your organization will receive fraud tips.

Fraud training also sends a powerful message about your intention to fight fraud no matter where it originates. Employees must perceive a high probability that fraudulent activity will be detected. The perception of detection is often enough to dissuade them.

We Can Help

Your financial advisors can help reinforce your internal controls by conducting training sessions, performing surprise audits and assessing company-specific fraud risks. Organizations that currently issue compiled or reviewed financial statements also might consider upgrading to audited financials next year. And, if you detect suspicious activity, a forensic accounting specialist can investigate further. Doing so can potentially save your organization thousands, if not millions, of dollars in losses and put everyone on alert that fraud won't be tolerated.

©  2024