By Shelley A. Drury, Managing Director
Occupational fraud defined as “frauds that are committed by individuals against organizations that employ them is a costly and common financial crime. The Association of Certified Fraud Examiners (ACFE) recently issued their “Occupational Fraud 2022: A Report to the Nations” publication. It provides key statistical updates on occupational fraud for 2,110 cases investigated between January 2020 and September 2021.
COVID’s Impact on Occupational Fraud
The ACFE surveyed certified fraud examiners about what extent pandemic-related factors contributed to occupational fraud. Of the factors analyzed, 42% of cases reported “organizational staffing changes” as the most common, with 15% reporting “remote work” being the second most common factor.
The ACFE Report cautions that these statistics are the result of cases investigated between January 2020 and September 2021, not necessarily representative of frauds that were committed during that time. That said, the ACFE anticipates seeing additional pandemic-related factors and more frauds when they perform their next study in 2024.
Regarding job uncertainty during the pandemic – including fear of job loss, denial of raise or promotion, cut in benefits, cut in pay, and involuntary cut in hours – all increased risk factors for occupational fraud.
Why Occupational Fraud is so Common
There are many reasons occupational fraud is so common, but one key statistic is that the number of cases prosecuted are few and far between. In 2022, only 58% of organizations pursued criminal prosecution, compared to 65% in 2012. As a result, an individual who committed fraud against a prior employer is quite likely to not have that fraud show up on a background check. This strikes fear into business owners and HR departments worldwide, as background checks were reported to have been run in 57% of the fraud cases investigated, with 79% of those revealing no red flags.
Why Organizations Aren’t Pursuing Criminal Charges
Those surveyed responded as follows:
- 50% felt internal discipline was sufficient
- 30% feared bad publicity/embarrassment
Other reasons for not pursuing criminal charges included reaching a private settlement, too costly to litigate/prove and lack of evidence.
What Organizations Can do to Limit Their Risk
The obvious answer is to implement, monitor and enforce internal controls (diversification of duties, mandatory vacation policy, tip line, surprise audits, data monitoring analytics, fraud training for employees, code of conduct, etc.) to prevent occupational fraud from happening in the first place.
Another is recognizing the warning signs and keeping the following, staggering statistics in mind:
- 73% of occupational fraud was committed by men and 27% by women. Interestingly, the median loss suffered by organizations resulting from those frauds per instance was $125,000 for men and $100,000 for women.
- The tenure of perpetrators at an organization was found to strongly correlate to the size of the fraud. Fraudsters with at least 10 years of tenure caused average losses of $250,000 per instance, as compared to $50,000 with a tenure of one year or less and $100,000 with a tenure of one to five years.
- Fraudsters are collaborating more (collusion) making fraud more difficult to detect, up from 42% in 2012 to 58% in 2022.
- Knowing the most common methods by which fraud is uncovered is important. In 2022, 42% of fraud cases investigated were uncovered by tips, nearly three times as many cases as the next most common method of detection. Employees and customers accounted for 73% of fraud tips. The ACFE reported organizations with hotlines experienced average losses of $100,000 per instance, as compared to $200,000 per instance for organizations without tip lines. Note to business owners: anonymous tip lines and reporting methods is your best chance at detecting and stopping the fraud.
- In addition to tip lines, the job rotation/mandatory vacation policies and surprise audits (audits of employee reimbursements, etc.) were associated with a 50% reduction in both average fraud loss in dollars and duration.
- Individuals engaged in occupational fraud typically will display certain behavioral traits. The typical fraud duration in the ACFE Report was 12 months. In other words, for a full year, the perpetrator may be exhibiting one or more of the following more common warning signs:
- Living beyond means (39%)
- Known financial difficulties (25%)
- Unusually close association with vendor/customer (20%)
- Control issues and unwillingness to share duties (13%)
- Irritability, suspiciousness or defensiveness (12%)
- Bullying or intimidation (12%)
- Divorce/family problems (11%)
- Addiction problems (7%)
- Complains about inadequate pay (7%)
- Refusal to take vacations (7%)
We hope this information provides additional insight into occupational fraud and some ways for organizations to protect against it and respond to it.
Shelley A. Drury