Tuesday, November 25, 2008

Is White Collar Fraud On The Rise?

According to the most recent annual report on fraud from the Association of Certified Fraud Examiners, white collar fraud is on the rise and becoming more costly. Some of the key findings in their annual report include:
  • US Organizations lose 7% of annual revenue due to fraud, on average
  • Annual losses, based upon projected GDP for 2008, will be nearly $1 trillion
  • Average occupational fraud goes undetected for 2 years
  • Average occupational fraud is $175,000
  • More than 25% of occupational frauds exceeded $1 million
  • Most common fraud is corruption, following by fraudulent billing schemes, each approximately 25% of total cases studied
  • Most cases are uncovered as a result of tips, rather than audits
  • Implementation of anti-fraud controls has a significant impact on reducing fraud losses
  • Manufacturing, banking and insurance were the most likely industries to experience a fraud
  • Small businesses are especially vulnerable to fraud
  • Lack of internal controls most commonly cited as reason for fraud occurrence
  • Occupational frauds most often perpetrated by the accounting department or upper management
  • Occupational fraudsters are generally first time offenders - only 7 percent of cases studied
The ACFE defines "occupational fraud" as "The use of one's occupation for personal enrichment through deliberate misuse or misapplication of the employing organization's resources or assets."

Read the ACFE's 2008 report here.

Here is a good article reflecting some of these statistics with the prediction that fraud is on the rise in an economic downturn.

I tend to agree with much of these findings. However, I suspect that the average size fraud and frequency of $1 million+ frauds are overstated. The reason is that this survey was conducted on a sampling of cases investigated by ACFE members which generally will miss cases on the lower end of the scale. Many fraud cases are simply too small to involve outside forensic accountants or investigators and are handled internally with no publicity. This is unfortunate, but a fact in modern society. The 7% overall loss number for US businesses has been around for some time and held steady for at least the 25 years I have been in the investigations business. Finally, with economic cycles, I would expect white collar cases to increase. However, there is always an ambient level of crime which fluctuates through the cycles. The dips and peaks may not be as pronounced as one might imagine. The fact is that in down cycles, when we would expect fraud to increase, so are organizations being more vigilant in their accounting and attempts to maximize profit. This factor, I believe, tends to shed more light on fraud cases. As my old boss Jules Kroll used to say (paraphrasing), "When the water starts to dry up in the river, the rocks begin to appear."

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