The Association of Certified Fraud Examiners, (‘The ACFE’), based in Texas, USA, published their 13th bi-annual report last year, which is a Report to the Nations in occupational fraud and abuse: The 2024 Global Study. 2024 ACFE Report to the Nations.
What is occupational fraud?
Occupational fraud is fraud that occurs in and around the workplace. It is the use of one’s occupation ‘…for personal enrichment through the deliberate misuse or application of the organisation’s resources or assets’, as defined by the ACFE.
What is fraud?
There is no precise definition. Fraud is generally considered to be wrongful or criminal deception intended to result in financial or personal gain.
The Fraud Act 2006 does not so much define ‘fraud’ but rather clarifies that if you intend to take or omit to take action with a view to causing a gain or a loss, that will be fraud. This is different from previous criminal offences of fraud under the Theft Act whereby an actual financial gain or loss had to result in fraud, and so the web to catch those committing fraud or attempting to do so, has been widened.
What of corruption?
The same applies to corruption. The 2024 Report states that almost half of all reported cases included corruption.
Loosely defined, corruption occurs when someone in a position to make a decision, by incentive or benefit, financial or otherwise, is persuaded to make a decision according to the will of the briber. It occurs when there is a lack of transparency and accountability, but more importantly, if the culture of the business allows it, or worse, encourages it.
How is fraud measured?
Dr Martin Tunley in his book, ‘Mandating the measurement of fraud’, came up with a more scientific approach to measuring fraud, the explanation of which is beyond the remit of this blogpost.
The main difficulty is what to look for, and where to look for it. Most frauds only become known, once committed. They are like icebergs. You may see the tip but know that the fraud itself stems from the deep dark unfathomable waters, and the true extent is never likely to be known.
The measurement in the 2024 Global Study is notional. Figures are reported by Certified Fraud Examiners based upon cases they have been examining.
That means that figures for the true cost of fraud are likely to be significantly higher than considered, however much the 1,921 cases are analysed in 138 countries and territories, in 22 major industry categories.
The total loss is more than $3.1billion. The average loss per fraud was $1.7m. The median loss per case, $145,000.
However, what is generally agreed amongst the fraud theorists, academics, and anti-fraud practitioners, is that the loss of annual revenues to fraud in business is…5%.
Can a business afford to lose 5% of annual revenues to fraud?
The general objective of any business is to maximise profit and minimise cost.
To some, 5% is an affordable loss. It is rather like the ‘sandwich bar principle’. The owner of a bar knows that there will be spillage, breakages, the odd sandwich and drink pilfered here and there by staff and preferred customers alike. That figure is accounted for in higher prices: It is off-loaded onto other customers.
The same occurs in the mobile phone industry and car insurance. The cost and loss to fraud, is factored into raised premiums…shocking. Innocent customers pay for the cost of other’s fraud, criminal acts, and misdemeanours.
What if the figure increases by more than 5% of loss of annual revenues to fraud?
- How is a business going to know?
- What systems are there in place to measure fraud?
Probably none. Where do you start, other than to measure the loss discovered once the fraud was committed?
Who reports fraud:
A typical fraud lasts 12 months before detection.
43% of frauds were detected by tips, which is three times as many cases as the next common method.
More than half of tips came from employees, and nearly one-third came from sellers and customers.
Anti-fraud controls: Creating the right environment to speak out about fraud:
With a confidential and clearly defined mechanism to report concerns and provide fraud tips, sometimes with financial rewards for information which leads to a prosecution, (sometimes not), fraud is detected quicker, and fraud losses are lower.
Systems and checks generally, are key to preventing fraud. Without such systems and checks, you give a fraudster an opportunity to commit fraud. You make it easier. The 2024 Report asserts that more than half of occupational frauds occur due to lack of internal controls or an override of existing internal controls.
Who commits fraud?
In the 2024 Report, there was a positive correlation between those who had worked longest for an organization, and the increased cost of fraud. The 2024 Report states that 9% of fraud was committed by executives/upper management, but the cost of fraud, was 7 times greater than those carried out by employees.
The key departments recognised in which fraud occurred by percentage were:
- Operations, 14%
- Accounting, 12%
- Sales, 12%
Fraud theories:
Dr Cressey’s fraud triangle is a triangle of factors in which the ingredients produce fraud. The ingredients are: Pressure, opportunity, and rationalisation.
Dr Steve Allbrecht refers to the motivating factors for committing fraud:
- Pressure: Some of the factors cited as BEHAVIOURAL RED FLAGS include:
- Living beyond their means
- Close association with customers/contractors
- A desire to beat the system
- Excessive gambling/addictive personalities: Big spenders. Big charity donors (easy when its someone else’s money to ease the guilt possibly?)
- High personal debt
- Overwhelming desire for personal gain
- Opportunity to commit fraud: Some of the factors identified by Dr Allbrecht include:
- Too much trust in key employees
- A lack of lines of authority
- A lack of frequent policy and procedure audits
- No segregation of key duties
- A lack of independent checks.
- Workplace deviance: A study carried out by Hollinger and Clark, interviewing 12,000 employees over a 20 year period gave some cringing results:
- 90% of employees engage in workplace deviance which could include shirking/excuses for laziness, pretend sick days, workplace slowdowns, prolonged breaks etc…
- 1/3rd of employees interviewed accepted that they had stolen from their workplace. It ranged from pens, stationery, to toilet rolls, at the lower end (no pun intended), to embezzlement, and fraud at the high end.
How to combat fraud:
As a starter: A business should seek to reduce the opportunity to commit fraud. They should know their staff. They should know their strengths and weaknesses. The employee with debt, and alcohol dependency, should be distanced from cash and cheque validation. To protect the employee, and the employer. The employer should consider providing counselling and outside help to relieve that pressure. A caring employer is never a bad thing.
Maintenance of morale should of course be high on the agenda. Giving employees a reason to take ‘wages in kind’, can be avoided.
A business needs to have checks and balances. There must be systems and policies in place. They must be implemented. There should be regulation within the industry. That regulation should be effective and independent, ready and willing to punish those they regulate. Wrongdoers should be named and shamed.
This is a basic explanation of fraud, measurement, and how to reduce the opportunity, rationalisation, and relief of pressure to commit fraud. The subject is far more complicated to combat fraud. The blogpost is created to provoke thought and consideration on the subject.
National Security ramifications:
These facts and figures, without creating a culture of anti-corruption, without the appropriate systems and checks; without regulation and pro-active hunting down of perpetrators, and prosecution on a national scale, amplified, are a significant threat to national security.
Professor David Rosen is a solicitor-advocate and principal of David Rosen & Co. He is a Certified Fraud Examiner, a member of the ACFE Advisory Council, a member of RUSI, and a former strategic director of the Board of the ACFE UK Chapter. He regularly lectures on counter-fraud and counter-corruption as a Professor of Professional Practice at the Brunel University of London Law School.
