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REPORT TO THE NATIONSO N O C C U PAT I O N A L F R A U D A N D A B U S E2012 GLOBAL FRAUD STUDY| 2012 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSELetter from the President & CEOMore than 15 years ago, the ACFE’s founder and Chairman, Dr. Joseph T. Wells, CFE, CPA, conceptualized a groundbreaking research project to study the costs, methodologies and perpetrators of fraud within organizations. The result was the 1996 publication of the ACFE’s first Report to the Nation on Occupational Fraud and Abuse. Since then, we have released six additional Reports that have each expanded our knowledge and understanding of the tremendous financial impact occupational fraud and abuse has on businesses and organizations. We are proud to say that the information contained in the original Report and its successors has become the most authoritative and widely quoted body of research on occupational fraud.The data presented in our 2012 Report is based on 1,388 cases of occupational fraud that were reported by the Certified Fraud Examiners (CFEs) who investigated them. These offenses occurred in nearly 100 countries on six continents, offering readers a view into the global nature of occupational fraud. As in previous years, what is perhaps most striking about the data we gathered is how consistent the patterns of fraud are around the globe and over time. We believe this consistency reaffirms the value of our research efforts and the reliability of our findings as truly representative of the characteristics of occupational fraudsters and their schemes.On behalf of the ACFE, and in honor of its founder, Dr. Wells, I am pleased to present the 2012 Report to the Nations on Occupational Fraud and Abuse. It is my hope that practitioners, business and government organiza-tions, academics, the media and the general public throughout the world will find the information contained in this Report of value in their efforts to prevent, detect or simply understand the global economic impact of occupational fraud.James D. Ratley, CFEPresident and CEOAssociation of Certified Fraud Examiners2Table of ContentsExecutive Summary4Introduction6The Cost of Occupational Fraud8• Distribution of LossesHow Occupational Fraud Is Committed10Asset Misappropriation Sub-Schemes Duration of Fraud Schemes Detection of Fraud Schemes14Initial Detection of Occupational Frauds Median Loss by Detection Method Source of Tips Impact of Hotlines Detection Method by Organization Size Detection Method by Scheme Type Detection Method by Region Victim Organizations20Geographical Location of Organizations Types of Organizations Size of Organizations Methods of Fraud in Small Businesses Industry of Organizations Anti-Fraud Controls at Victim Organizations Effectiveness of Controls Importance of Controls in Detecting or Limiting Fraud Control Weaknesses that Contributed to Fraud Perpetrators39Perpetrator’s Position The Impact of Collusion Perpetrator’s Gender Perpetrator’s Age Perpetrator’s Tenure Perpetrator’s Education Level Perpetrator’s Department Perpetrator’s Criminal and Employment History Behavioral Red Flags Displayed by Perpetrators Case Results61Criminal Prosecutions Civil Suits Recovery of Losses Methodology64Appendix: Breakdown of Geographic Regions by Country67Fraud Prevention Checklist69Index70About the ACFE74R 2012 eport to the FNations on Occupational raud and Abuse |3| 2012 Report to the Nations on Occupational Fraud and AbuseExecutive SummarySummary of FindingsSurvey participants estimated that the typical organization loses 5% of its revenues to fraud each year. Applied to the 2011 Gross World Product, this figure translates to a potential pro-jected annual fraud loss of more than $3.5 trillion. The median loss caused by the occupational fraud cases in our study was $140,000. More than one-fifth of these cases caused losses of at least $1 million. The frauds reported to us lasted a median of 18 months before being detected. As in our previous studies, asset misappropria-tion schemes were by far the most common type of occupational fraud, comprising 87% of the cases reported to us; they were also the least costly form of fraud, with a median loss of $120,000. Financial statement fraud schemes made up just 8% of the cases in our study, but caused the greatest median loss at $1 million. Corruption schemes fell in the middle, occurring in just over one-third of reported cases and causing a median loss of $250,000. Occupational fraud is more likely to be detected by a tip than by any other method. The majority of tips reporting fraud come from employees of the victim organization. Corruption and billing schemes pose the greatest risks to organizations throughout the world. For all geographic regions, these two scheme types comprised more than 50% of the frauds reported to us. Occupational fraud is a significant threat to small businesses. The smallest organizations in our study suffered the largest median losses. These organizations typically employ fewer anti-fraud controls than their larger counterparts, which increases their vulnerability to fraud. As in our prior research, the industries most commonly victimized in our current study were the banking and financial services, government and public administration, and manufacturing sectors. The presence of anti-fraud controls is notably correlated with significant decreases in the cost and duration of occupational fraud schemes. Victim organizations that had implemented any of 16 common anti-fraud controls experienced considerably lower losses and time-to-detection than organizations lacking these controls. More than one-fifth of frauds in our study caused at least $1 million in losses.Perpetrators with higher levels of authority tend to cause much larger losses. The median loss among frauds committed by owner/ executives was $573,000, the median loss caused by managers was $180,000 and the median loss caused by employees was $60,000. The longer a perpetrator has worked for an organization, the higher fraud losses tend to be. Perpetrators with more than ten years of experience at the victim organization caused a median loss of $229,000. By comparison, the median loss caused by perpetrators who committed fraud in their first year on the job was only $25,000. The vast majority (77%) of all frauds in our study were committed by individuals working in one of six departments: accounting, opera-tions, sales, executive/upper management, customer service and purchasing. This distribu-tion was very similar to what we found in our 2010 study. Most occupational fraudsters are first-time offenders with clean employment histories. Approximately 87% of occupational fraudsters had never been charged or convicted of a fraud-related offense, and 84% had never been punished or terminated by an employer for fraud-related conduct. 4In 81% of cases, the fraudster displayed one or more behavioral red flags that are often associated with fraudulent conduct. Living be-yond means (36% of cases), financial difficulties (27%), unusually close association with vendors or customers (19%) and excessive control issues (18%) were the most commonly observed behavioral warning signs. Conclusions and RecommendationsThe nature and threat of occupational fraud is truly universal. Though our research noted some regional differences in the methods used to com-mit fraud — as well as organizational approaches to preventing and detecting it — many trends and characteristics are similar regardless of where the fraud occurred. Providing individuals a means to report suspi-cious activity is a critical part of an anti-fraud program. Fraud reporting mechanisms, such as hotlines, should be set up to receive tips from both internal and external sources and should allow anonymity and confidentiality. Management should actively encourage employees to report suspicious activity, as well as enact and emphasize an anti-retaliation policy. External audits should not be relied upon as an organization’s primary fraud detection method. Such audits were the most commonly imple-mented control in our study; however, they de-tected only 3% of the frauds reported to us, and they ranked poorly in limiting fraud losses. While external audits serve an important purpose and can have a strong preventive effect on potential fraud, their usefulness as a means of uncovering fraud is limited. Targeted fraud awareness training for employees and managers is a critical component of a well-rounded program for preventing and detecting fraud. Not only are employee tips the most com-mon way occupational fraud is detected, but our research shows organizations that have anti-fraud training programs for employees, managers and executives experience lower losses and shorter frauds than organizations without such programs in place. At a minimum, staff members should be educated regarding what actions constitute fraud, how fraud harms everyone in the organization and how to report questionable activity. Nearly half of victim organizations do not re-cover any losses that they suffer due to fraud. As of the time of our survey, 49% of victims had not recovered any of the perpetrator’s takings; this finding is consistent with our previ-ous research, which indicates that 40–50% of victim organizations do not recover any of their fraud-related losses. Our research continues to show that small busi-nesses are particularly vulnerable to fraud. These organizations typically have fewer resources than their larger counterparts, which often translates to fewer and less-effective anti-fraud controls. In addition, because they have fewer resources, the losses experienced by small businesses tend to have a greater impact than they would in larger organizations. Managers and owners of small businesses should focus their anti-fraud efforts on the most cost-effective control mechanisms, such as hotlines, employee education and setting a proper ethical tone within the organization. Ad-ditionally, assessing the specific fraud schemes that pose the greatest threat to the business can help identify those areas that merit additional investment in targeted anti-fraud controls. Most fraudsters exhibit behavioral traits that can serve as warning signs of their actions. These red flags — such as living beyond one’s means or ex-hibiting excessive control issues — generally will not be identified by traditional internal controls. Managers, employees and auditors should be educated on these common behavioral patterns and encouraged to consider them — particularly when noted in tandem with other anomalies — to help identify patterns that might indicate fraudulent activity. The cost of occupational fraud — both financially and to an organization’s reputation — can be acutely damaging. With nearly half of victim orga-nizations unable to recover their losses, proactive measures to prevent fraud are critical. Manage-ment should continually assess the organization’s specific fraud risks and evaluate its fraud preven-tion programs in light of those risks. A checklist such as the one on page 69 can help organiza-tions effectively prevent fraud before it occurs. R 2012 eport to the FNations on Occupational raud and Abuse |5Introduction| 2012 Report to the Nations on Occupational Fraud and AbuseThe term fraud has come to encompass many forms of misconduct. Although the legal definition of fraud is very specific, for most people — anti-fraud profession-als, regulators, the media and the general public alike— the common usage is much broader and generally covers any attempt to deceive another party to gain a benefit. Health care fraud, identity theft, paddedexpense reports, mortgage fraud, theft of inventory by employees, manipulated financial statements, insider trading, Ponzi schemes — the range of possible fraud schemes is large, but at their core, all of these acts involve a violation of trust. It is this violation, per-haps even more than the resulting financial loss, that makes such crimes so harmful.For businesses to operate and commerce to flow, companies must entrust their employees with re-sources and responsibilities. So when an employee defrauds his or her employer, the fallout is often especially harsh. This report focuses on occupational fraud schemes in which an employee abuses the trust placed in him or her by an employer for personal gain. The formal definition of occupational fraud is:The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assetsWhile this category is but one facet of the overall fraud universe, occupational fraud covers a wide range of employee misconduct and is a threat faced by all organizations worldwide.To support the ACFE’s mission of educating anti-fraud professionals and the general public about the perva-sive threat of occupational fraud, we have undertaken extensive research into the costs and trends related to occupational fraud schemes. The findings of our initial research efforts were released in 1996 in thefirst Report to the Nation on Occupational Fraud and Abuse, with subsequent Reports released in 2002, 2004, 2006, 2008, 2010 and the current version in 2012. The stated goals of these Reports have been to:Summarize the opinions of experts on the percentage of organizational revenue lost to all forms of occupational fraud and abuse. Categorize the ways in which occupational fraud and abuse occur. Examine the characteristics of the employees who commit occupational fraud and abuse. Determine what kinds of organizations are victims of occupational fraud and abuse. Each version of the Report has been based on de-tailed information about fraud cases investigated by Certified Fraud Examiners (CFEs). With each new edi-tion we have expanded and modified the analysis con-tained in the previous Reports to reflect current issues and enhance the quality of the data that is reported. This evolution has allowed us to draw increasingly meaningful information from the experiences of CFEs and the frauds they encounter.The 2012 Report to the Nations on Occupational Fraud and Abuse provides an analysis of 1,388 fraud cases investigated worldwide and continues our tradition of shedding light on trends in the characteristics of fraudsters, the schemes they perpetrate and the or-ganizations being victimized. Throughout the Report, we include comparison charts showing several years’ worth of data, which highlights the consistency of our findings over time; this uniformity is among the most notable observations from our ongoing research, and we believe it indicates that many of our findings truly reflect global trends in occupational fraud and abuse.6
Solution: Accounting Information Systems Fraud part 1