Fraud schemes have been highly publicized and have a devastating effect on companies public and private, large and small.  The Association of Certified Fraud Examiners (ACFE) recently released its 2010 Global Fraud Study, the Report to the Nations on Occupational Fraud and Abuse.  The 2010 Report contained a number of noteworthy observations, including:

The typical organization loses 5% of annual revenues to fraud.  This percentage is based on estimates of the study’s participants, which includes professionals such as fraud examiners, internal auditors, accountants and law enforcement professionals.  Almost 25% of fraud cases in the study involved losses of at least $1 million.

Fraud schemes lasted a median time of 18 months before being detected.  The duration of schemes was reduced significantly when organizations had anti-fraud controls such as implementing management reviews, internal audit or fraud departments, and surprise audits.

Asset misappropriation schemes were the most common form of fraud. These schemes accounted for 90% of cases reported in the 2010 study, consistent with past studies.  Asset misappropriation schemes fall into three main categories: schemes involving theft of cash receipts (Skimming and Cash Larceny); schemes involving fraudulent disbursements of cash (Billing, Expense Reimbursements, Check Tampering, Payroll and Cash Register Disbursements); and other asset misappropriation schemes (Cash-on-Hand Misappropriation and Non-Cash Misappropriation).  Frauds involving fraudulent financial statement reporting made up less than 5% of the cases in the 2010 study, but resulted in a median loss of over $4 million.

High-level perpetrators cause the greatest damage to companies.  Executive-level frauds were significantly more damaging than frauds caused by managers or employees, and took much longer to detect.  More than 80% of the fraud schemes in the study involved individuals in either the accounting, operations, sales, executive/upper management, customer service or purchasing departments.

Fraud schemes hit smaller companies more often.  Smaller organizations typically lack many anti-fraud controls found at larger companies, which make them inviting targets for fraudsters.  Organizations that had common anti-fraud controls in place had significantly lower losses and time-to-detection than organizations without controls.  For example, the 2010 Report found that surprise audits are an effective, yet underutilized tool in the fight against fraud, resulting in lower fraud losses and quicker detection times.  Surprise audits create the perception of detection, and the threat of employees being subject to surprise audits can create a powerful deterrent.

Smaller companies should focus on the most cost-effective controls.  One cost-effective control for any size company is management setting an ethical tone for the employees of the organization, also known as the “tone at the top”.  The most important factors observed in frauds at smaller companies were a lack of internal controls, lack of management review, override of existing controls, and poor tone at the top.  Interestingly, poor tone at the top was a factor observed nearly three times as often in frauds involving losses of at least $1 million than in frauds of less than $1 million.

F3’s professionals have experience in investigating, quantifying and reporting on fraud schemes such as asset misappropriation and financial statement misstatements.  We have assisted boards of directors, management, special committees, internal and external counsel, and government agencies.  We can evaluate your existing anti-fraud programs and controls, and financial areas of greatest risk for fraud.  Please contact Dave Weekly at 602.315.8543 or to discuss how F3 can help your organization or clients when it comes to defeating fraud.