Key Steps for Countering Growing Corporate Fraud

Corporate fraud is on the rise, and the costs to victim organizations average a considerable 5% of the affected years’ revenues, according to the Association of Certified Fraud Examiners’ (ACFE) 2016 Report to the Nations on Occupational Fraud and Abuse. The report details how fraud is being perpetrated, discovered, and resisted in various industries and regions based on 2,410 cases of fraud investigated between January 2014 and October 2015. Important information about the increasing cost of fraud, vulnerability of small organizations and use of internal controls are presented in the report. To help our clients, prospects, and others understand and utilize this valuable information, JLK Rosenberger has provided a summary of key details below.

The Cost of Fraud

The losses caused by fraud reported in the study totaled more than $6.3 billion, an average loss of $2.7 million per case, although that number was boosted significantly by the more than 23% of cases with losses totaling $1 million or more. The median loss was $150,000, and the longer a fraud lasted, the greater the financial damage it caused.

Asset misappropriation was the most reported type of fraud, which took place in 83% of the cases but caused the smallest median loss at $125,000. By contrast, financial statement fraud was the culprit in less than 10% of cases but caused the biggest median loss at $975,000. Corruption cases fell in the middle, with 35.4% of cases and a median loss of $200,000.

While these numbers underscore the impact of an increasing corporate threat, they may not even fully represent the negative effect of fraud on a company’s finances and reputation. It is impossible to know exactly how much fraud goes undetected or unreported, and even calculations based solely on known fraud cases are likely to be underestimated as many victims downplay or miscalculate the amount of damage. In fact, in over 40% of the reported fraud cases, the victim organizations decided not to refer their cases to law enforcement, with “fear of bad publicity” being the most-cited reason.

Small Organizations are Vulnerable

Organizations with fewer than 100 employees were the most likely to suffer from fraud, representing about 30% of the cases reported, with a median loss of $150,000. This is the same amount lost by large organizations (10,000+ employees) and more than those with between 1,000 and 10,000 employees. However, the impact on small organizations is even greater because they have fewer resources to survive losses.

Organizations of different sizes tend to have different fraud risks as well. Corruption was more prevalent in larger organizations, while check tampering, skimming, payroll, and cash larceny schemes were twice as common in small organizations. This was propelled by the fact the organizations have invested significantly less in fraud prevention measures.

Implementation of Controls

Organizations may be learning that anti-fraud controls can greatly reduce the cost and duration of fraud schemes, which was evidenced by increases from 2010 data in the percentage of firms using hotlines, training employees on fraud, and implementing anti-fraud policies and codes of conduct. However, in general, the U.S. generally lags behind in implementation of key controls. The frequency of controls in the U.S. is followed by the frequency worldwide in the listing below:

• Code of conduct – 74.6%/81.1%
• External audit of financial statements – 74.2%/81.7%
• Employee support programs – 66%/56.1%
• Management certification of financial statements – 64.1%/71.9%
• Internal audit department – 61.4%/73.7%
• External audit of internal controls over financial reporting (ICOFR) – 59.8%/67.6%
• Management review – 57.3%/64.7%
• A hotline – 54.5%/60.1%
• An independent audit committee – 53.8%/62.5%
• Fraud training for managers and executives – 50.5%/51.3%
• Fraud training for employees – 49/3%/51.6%

Contact Us

The information provided in the report provides a clear picture not only about the increase of fraud, but also company’s steps and efforts to prevent. The lesson is clear. Having a robust series of programs and controls can help to significantly reduce the possibility of fraud at a company. If your organization needs assistance implementing internal controls and anti-fraud measures, including specific advice about particular anti-fraud resources and programs, JLK Rosenberger can help. Call our team at (949) 860-9902 or click here to e-mail us.