Numbers Don’t Lie: Critical Lessons from the 2014 Report to the Nations

When determining the impact of fraud on organizations and the economy, statistics still provide the best measuring stick – and they communicate facts in a compelling way.

May 2014

By Scott Patterson, CFE

When determining the impact of fraud on organizations and the economy, statistics still provide the best measuring stick – and they can communicate facts in a compelling way. Tell a business leader they likely have a fraud problem, and they might politely thank you for the warning … then go on about their business. Show them that their hard-fought, built-from-the-ground-up entrepreneurial dream might be losing 5 percent of its revenues, or more, to fraud, and the reaction is likely to be one of surprise or even shock. Explain that the median fraud loss for a single case is $145,000, and most business leaders, especially those who run small companies, will understand what that means – and the danger such a risk can pose to their economic survival.

Every two years, the ACFE’s Report to the Nations on Occupational Abuse serves as the messenger that brings these and other serious statistics into focus. The median length of a fraud case prior to detection? 18 months. The most likely detection method? Tips, by far (42 percent of cases).  The Report also details findings such as how organizations were affected based upon industry, how the implementation of anti-fraud controls affected exposure to fraud, the breakdown of fraud statistics by geographical region and the most common behavioral traits observed among fraud perpetrators.

Many of the  benchmarks within its 80 pages have remained fairly consistent over the past several editions of the Report – and the 2014 version marks the seventh since the iconic publication was first authored by the ACFE in 1996. So those trends that do emerge bear even more weight in understanding how fraud might impact organizations in the future.

Methodology – The Making of the Report

The statistics that take center stage in the Report are drawn from a survey of Certified Fraud Examiners (CFEs) who investigated cases between January 2012 and December 2013. These respondents are asked to provide detailed information on a fraud they investigated, and (for the first time, in the 2014 edition) invited to provide information on a second fraud, as well.  In total, information from 1,483 cases submitted by CFEs in more than 100 nations was compiled to develop the benchmarking statistics on occupational fraud losses, detection methods and perpetrators.

In the hands of fraud examiners, the Report is a tool like no other: it spreads the message in a language that business leaders understand, and must pay attention to. There is a price to be paid for ignoring the risk and cost of fraud, and this price is quantified in the Report.

Proactive vs. Reactive

There is a stark finding that is new to the 2014 Report, and it’s something every fraud examiner should relate to their clients and potential clients: The way fraud is detected matters. It matters whether the fraud was discovered through a tip, by other internal controls, by accident or by some other method. John Warren, J.D., CFE, ACFE Vice President and General Counsel, explains why: “In other words, we looked at losses – organizations catching fraud through proactive measures tend to have lower losses, and they catch fraud more quickly. When a fraud is detected from the point of a call from the police, an outside audit or some other external measure, then those are the frauds that tend to be larger, more costly and more damaging.”

Warren, who co-authored the Report with ACFE Director of Research Andi McNeal, CFE, CPA, was quick to point out that the study shows anti-fraud controls are still lacking across a wide swath of victim organizations.

“Barely half of the victim organizations had anti-fraud hotlines … even though we know tips are the best way to detect fraud,” Warren said. Indeed, tips were far ahead of any other detection method at 40 percent – followed by internal audit (15.2 percent) and management review (14.6 percent).

“You should try harder to facilitate getting tips from your employees, vendors and customers. We know this now,” Warren said. “Having a hotline, having fraud training for employees, and to some extent, having rewards for whistleblowers are critical aspects of an anti-fraud program.”

Training and other measures are key, as well. “Our concern here is that fraud training and hotlines don’t rank very highly in terms of anti-fraud controls that we see among these companies that are victimized,” Warren said. “Only 45 percent had an anti-fraud policy at all. Organizations aren’t implementing the most effective measures to detect fraud, and we’ve seen this since we started tracking these cases.”

Small Businesses in the Crosshairs

Warren also pointed out that, as in previous Reports, the data shows that small businesses suffer disproportionately high losses to fraud. While the median loss for all cases in the study is $145,000, the median loss for an organization with fewer than 100 employees is $154,000. These organizations typically employ fewer anti-fraud controls than their larger counterparts, which increases their vulnerability to fraud.

“Small businesses typically have less ability to absorb such a loss,” Warren said. While a $154,000 loss probably won’t sink a large organization, “it can obviously be much more devastating to a small company.”

Consistency Lends Credibility

As noted above, many of the key findings in the Report have remained remarkably consistent.  For example, the three types of occupational fraud cases studied in the Report are asset misappropriation, corruption and financial statement fraud. The study shows that these types of fraud were represented in 85.4 percent, 38.6 percent, and 9 percent of cases, respectively (a fraud case can include different elements, thus the sum is not 100). This matches within just a few percentage points the breakdown shown in the 2010 and 2012 Reports.

This indicates that the data is reliable. Warren notes this: “One of the most interesting things about the study is that every time we get almost the exact same distribution between the different types of fraud. The study involves individual fraud cases, so every two years we have an entirely different subset of schemes. And yet, we still get the same distribution for the types of fraud in every study.

“This consistency makes us feel very confident about the accuracy of our findings,” Warren said. “These are established trends, and so where we do see changes within the data, they provide a really good way for organizations to benchmark risk.”

They also provide a great way for anti-fraud professionals to communicate that risk. The message is getting out, but the latest findings in this Report suggest there is still a long way to go. Fraud examiners should keep their copy of the Report to the Nations handy. You never know when a doubting business owner or manager will need a dose of clear and compelling statistics to make proactive fraud prevention a priority.

Download the 2014 Report to the Nations on Occupational Fraud and Abuse at  ACFE.com/RTTN.