REPORT TO THE NATIONS 2018 GLOBAL STUDY ON OCCUPATIONAL FRAUD AND ABUSE

Transcription

1 REPORT TO THE NATIONS 2018 GLOBAL STUDY ON OCCUPATIONAL FRAUD AND ABUSE

2 FOREWORD Bruce Dorris, J.D., CFE, CPA President and CEO, Association of Certified Fraud Examiners With the publication of the 2018 Report to the Nations, I am struck by how this study, like the Association of Certified Fraud Examiners itself, is in many ways a tribute to the vision and dedication of our founder and chairman, Dr. Joseph T. Wells, CFE, CPA. When Dr. Wells created the ACFE, he did so because he recognized there was a fundamental flaw in how organizations were attempting to prevent, detect, and investigate fraud. His goal in founding our association was to establish a body of knowledge and training that would help anti-fraud professionals reduce the incidence of fraud and white-collar crime. One thing Dr. Wells came to recognize in the early days of the ACFE was that the anti-fraud profession suffered from a glaring weakness: we simply did not know enough about the crimes we were trying to fight. So, with the aid of ACFE researchers John Warren and Andi McNeal, he set out to address the problem by commissioning the first Report to the Nation in The 2018 report is the 10th edition of Dr. Wells study, and the Report to the Nations remains the most comprehensive and widely quoted source of occupational fraud data in the world. Based on information from real fraud cases as reported by CFEs from around the globe, the report continues to be a tremendous resource for those interested in how occupational fraud is committed, how it is detected, who commits it, and how organizations can protect themselves from it. On behalf of the ACFE, I am proud to present the 2018 edition of the Report to the Nations. Bruce Dorris, J.D., CFE, CPA President and CEO, Association of Certified Fraud Examiners 2 Foreword Report to the Nations

3 CONTENTS Key Findings 4 Introduction 6 The Cost of Occupational Fraud 8 Projecting Total Fraud Losses Based on Imperfect Data 8 The Fraud Costs We Know 8 How Occupational Fraud Is Committed 10 Categories of Occupational Fraud 10 Spotlight: Corruption 13 Duration of Fraud Schemes 14 Spotlight: Concealing Fraud 14 Detection 16 Initial Detection of Occupational Frauds 16 Tip Sources 17 Median Loss and Duration by Detection Method 18 Spotlight: Hotlines and Reporting Mechanisms 19 Victim Organizations 20 Type of Organization 20 Size of Organization 21 Spotlight: Fraud in Small Businesses 22 Industry of Organization 24 Anti-Fraud Controls at the Victim Organization 26 Perpetrators 33 Perpetrator s Position 33 Perpetrator s Tenure 34 Spotlight: Fraud Committed by Owners and Executives 34 Perpetrator s Department 36 Perpetrator s Gender 39 Perpetrator s Age 41 Perpetrator s Education Level 41 Collusion by Multiple Perpetrators 42 Perpetrator s Criminal Background 42 Perpetrator s Employment History 43 Behavioral Red Flags Displayed by Perpetrators 43 Spotlight: The Red Flags of Fraud 44 Non-Fraud-Related Misconduct by Perpetrators 46 Human Resources-Related Red Flags 46 Case Results 47 Internal Action Taken Against Perpetrator 47 Criminal Prosecutions and Civil Suits 48 Spotlight: When Victim Organizations are Fined 50 Spotlight: Recovering Fraud Losses 51 Methodology 52 Analysis Methodology 52 Survey Participants 54 Regional Focus 56 Asia-Pacific 56 Canada 58 Eastern Europe and Western/Central Asia 60 Latin America and the Caribbean 62 Middle East and North Africa 64 Southern Asia 66 Sub-Saharan Africa 68 United States 70 Western Europe 72 Index of Figures 74 Fraud Prevention Checklist 76 Glossary of Terminology 78 About the ACFE 79 Contents Report to the Nations 3

4 KEY FINDINGS 2,690 real cases of IN TOTAL LOSSES occupational fraud from 125 in 23 countries industry categories $7 billion+ $130,000 MEDIAN LOSS PER CASE 22% OF CASES CAUSED LOSSES OF $1 million+ Median duration of a fraud scheme MONTHS Corruption was the most common scheme in every global region Asset Misappropriation schemes are the most common and least costly $114,000 median loss 89% of cases financial statement fraud schemes are the least common and most costly 10% of cases $800,000 median loss Tips tips employees are by far the most common initial detection method 40% internal audit 15% provide over half of tips, and nearly 1/3 come from outside parties 46% OF CASES DETECTED BY TIP management review 13% Organizations with hotlines detect fraud by tips more often 30% OF CASES DETECTED BY TIP HOTLINES NO HOTLINES SMALL BUSINESSES LOST ALMOST TWICE AS MUCH PER SCHEME TO FRAUD $104,000 MEDIAN LOSS 100+ EMPLOYEES $200,000 MEDIAN LOSS <100 EMPLOYEES 4 Key Findings Report to the Nations

5 INTERNAL CONTROL WEAKNESSES WERE RESPONSIBLE FOR NEARLY HALF OF FRAUDS Owners/executives accounted for a small percentage of cases Losses caused by men were 75% larger than losses caused by women ALL 18 ANTI-FRAUD CONTROLS ANALYZED WERE ASSOCIATED WITH LOWER FRAUD LOSSES AND QUICKER DETECTION 19% but caused a median loss of $850,000 1 $$$$$$$ of cases $74,000 2 $$$$$$$$$$$$$$ $150, median losses are far greater when fraudsters collude $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ $339,000 DATA MONITORING/ANALYSIS and SURPRISE AUDITS were correlated with the largest reductions in fraud loss and duration Data monitoring/ analysis 58% lower losses 52% faster detection Surprise audits 54% lower losses faster detection 51% Yet only 37% of victim organizations implemented these controls TOP REASON FOR NON-REFERRALS WAS FEAR OF BAD PUBLICITY 85% of fraudsters displayed at least one behavioral red flag of fraud Over the past 10 years, occupational fraud referrals to prosecution declined 16% -16% FRAUDSTERS WHO HAD BEEN WITH THEIR COMPANY LONGER STOLE TWICE AS MUCH Only 4% OF PERPETRATORS HAD A PRIOR FRAUD CONVICTION $200,000 MORE THAN 5 YEARS TENURE MEDIAN LOSS LESS THAN 5 YEARS TENURE $100,000 MEDIAN LOSS A MAJORITY OF THE VICTIMS RECOVERED NOTHING Key Findings Report to the Nations 5

6 INTRODUCTION Fraud in general poses a tremendous threat to organizations of all types and sizes, in all parts of the world. Among the various kinds of fraud that organizations might be faced with, occupational fraud is likely the largest and most prevalent threat. Occupational fraud 1 fraud committed against the organization by its own officers, directors, or employees constitutes an attack against the organization from within, by the very people who were entrusted to protect its assets and resources. Since we began tracking data on occupational fraud cases in 1996, we have reviewed thousands of cases in which insiders collectively stole billions of dollars from their employers, and those cases were merely a drop in the bucket. There are millions of business and government organizations operating throughout the world and every one of them, in some way, is vulnerable or potentially vulnerable to fraud committed by their employees. Most of those employees will never steal or abuse the trust that has been placed in them, but the ones who do can cause enormous damage. It is because of this risk that we continue to study these frauds and publish the Report to the Nations. This study contains an analysis of 2,690 cases of occupational fraud that were investigated between January 2016 and October The data presented herein is based on information provided by the Certified Fraud Examiners who investigated those cases. Their firsthand experience with these frauds provides an invaluable resource for helping us un- 1 Occupational fraud is defined as the use of one s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization s resources or assets. The goal of the Report to the Nations is to compile detailed information about occupational fraud cases in five critical areas: The methods by which occupational fraud is committed The means by which occupational frauds are detected The characteristics of the organizations that are victimized by occupational fraud The characteristics of the people who commit occupational fraud The results of the cases after the frauds have been detected and the perpetrators identified derstand occupational fraud and the impact it has on organizations. The data we have gathered provides a broad and deeply representative picture of occupational fraud s impact. The cases in this study include frauds committed against organizations in 23 major industry categories. Victim organizations range from small local businesses to multinational corporations with thousands of employees. These frauds were committed by 6 Introduction Report to the Nations

7 individuals who worked in virtually every part of the organization, from entry-level employees to C-suite executives. The cases we studied occurred in 125 countries throughout the world, which helps us develop a global view of the costs, methods, victims, and perpetrators of these crimes. Figure 1 shows the number of cases from nine key geographical regions, along with the median loss per fraud in each of those regions. (Readers should note that the number of cases per region largely reflects the geographical distribution of ACFE membership, so this data should not be taken to mean that fraud is more or less likely in any particular region.) Our hope is that the findings in this report will be of value to anti-fraud professionals, organizational man- agers, researchers, and the public at large. Readers will find a wealth of information about the methods, causes, costs, and indicators of occupational fraud, as well as important information on how to prevent and detect it. This study is the 10th edition of the Report to the Nations, and occupational fraud remains an enormous threat to the global economy, just as it was when we published the first edition in But in the time since that first report, we have seen organizations make tremendous strides in terms of awareness, along with significant advancements in their ability to combat these crimes. Such advances are only possible when there is a true understanding of the nature and extent of the threat that must be dealt with. We publish this 2018 Report to the Nations hoping it will advance the collective understanding and awareness of occupational fraud risk for all those concerned. FIG. 1 Countries with reported cases and median loss for each region2 United States MEDIAN LOSS: CASES: 1,000 (48%) $108,000 Western Europe MEDIAN LOSS: 2 LOSS: CASES: 130 (6%) LOSS: $100,000 MEDIAN MEDIAN $200,000 Southern Asia Sub-Saharan Africa Latin America and the Caribbean MEDIAN LOSS: CASES: 96 (5%) $90,000 $193,000 Eastern Europe and Western/Central Asia MEDIAN LOSS: $150,000 CASES: 267 (13%) Asia-Pacific MEDIAN LOSS: CASES: 110 (5%) Middle East and North Africa MEDIAN LOSS: CASES: 86 (4%) $236,000 $200,000 Canada MEDIAN LOSS: $200,000 CASES: 220 (11%) CASES: 101 (5%) CASES: 82 (4%) Geographical information was provided in 2,092 of the cases submitted. See pgs for lists of cases submitted by country. Introduction Report to the Nations 7

8 THE COST OF OCCUPATIONAL FRAUD How much money do organizations lose as a result of fraud? Anti-fraud professionals know just how devastating a fraud can be to its victims. But they are not the only ones who benefit from insight into the amount of damage that fraud causes organizations and their stakeholders. Business leaders need to understand how much is at stake as they assess their risks and make resource-allocation decisions. Regulators need to determine where to focus their enforcement efforts. Investors and customers need to make informed decisions about where to direct their own money. And the media desires context and direction for helping to raise awareness of the issue to the general public. Accordingly, providing a measure of the cost of fraud is an incredibly important endeavor. It is also an incredibly difficult one, given the number of unknown factors required to make such an estimate. No one knows the amount of frauds that go undetected or unreported, and even for those frauds that do come to light, the full amount of loss might never be calculated. Such limitations mean that any attempts to quantify the global amount of fraud will be imperfect. Projecting Total Fraud Losses Based on Imperfect Data Even with these limitations on projecting the total amounts lost to fraud, however, we know that such a projection has an important place in the fight against fraud. Consequently, we asked survey participants, based on their professional experience, what percentage of revenues they believe a typical organization loses to fraud each year. The median response provided by these CFEs is that organizations lose 5% of their annual revenues to fraud. While this number is only a general estimate based on the opinions of the CFEs who took part in our study, it represents the collective observations of more than 2,000 anti-fraud experts who together have investigated hundreds of thousands of fraud cases. To place their estimate in context, if the 5% loss estimate were applied to the 2017 estimated Gross World Product of USD 79.6 trillion, it would result in a projected total global fraud loss of nearly USD 4 trillion. 3 To be clear, this number is only an estimate and, given the limitations described above, it is unlikely we will ever be able to calculate the true cost of fraud on a global scale. But we can be certain that the amount of damage is incredibly large, and this estimate, provided by anti-fraud professionals who work to prevent and detect fraud on a daily basis, helps give us some insight into just how big the problem may be. The Fraud Costs We Know Determining total fraud losses whether globally, regionally, by industry, or even within a specific organization is outside the primary scope of our study. Instead, we focus on analyzing known data to better under- 3 See xx.html (retrieved March 22, 2018). 8 The Cost of Occupational Fraud Report to the Nations

9 stand the risks posed by occupational fraud. To that end, we examined the losses incurred in the actual cases of fraud reported to us to learn about how fraud affects its victims. The total loss caused by the cases in our study exceeded USD 7.1 billion. 4 While we do not know the total number of cases of fraud that occurred globally during our study period, it is safe to assume that the 2,690 cases included in our study represent only a tiny fraction of the frauds committed against organizations worldwide during that time. Thus, the USD 7.1 billion in known losses while staggering on its own does not come close to representing the total amount lost to fraud. The true global cost of fraud is likely magnitudes higher, especially when factoring in the indirect costs, such as reputational harm and loss of business during the aftermath of a scandal. FIG. 2 How much does an occupational fraud cost the victim organization? Less than $200,000 $200,000 $399,999 $400,000 $599,999 $600,000 $799,999 $800,000 $999,999 $1 million or more 55% 11% 7% 3% 2% 22% The mean, or average, loss due to the frauds in our study was USD 2.75 million, 5 which is also an enormous amount when considering how much damage such a loss represents to most organizations. However, due to the presence of several very large frauds in our data, this amount likely does not illustrate the typical fraud case. Consequently, throughout this report we use median loss calculations, rather than mean, to provide a more accurate representation of how fraud typically affects organizations. Throughout this report, we further examine these losses through different lenses, based on the specific schemes, victim organizations, perpetrators involved, and other factors. We hope that our research into and analysis of these cases helps shed additional light on the way that fraud impacts the global business community and its stakeholders. The median loss for all cases in our study was USD 130,000. Figure 2 shows the loss distribution of the cases. While 55% caused less than USD 200,000 in financial damage, more than one-fifth resulted in a loss of at least USD 1 million. 4 The total losses represented in our study were actually significantly higher than USD 7.1 billion. However, our survey results included a few cases with losses so large that including them in the total loss figure may have enabled them to be identified. To avoid compromising the confidentiality of our survey participants, we winsorized the top and bottom 1% of the data used in this total loss calculation (i.e., assigned all cases in the top 1% and bottom 1% the same value as the 99th percentile and 1st percentile, respectively). While including those cases would increase the total loss amount figure substantially, we believe it prudent to both ensure those cases remain unidentified and conservatively report loss amounts. 5 As with the total loss figure, the top and bottom 1% of the data were winsorized for purposes of the average loss calculation. The Cost of Occupational Fraud Report to the Nations 9

10 HOW OCCUPATIONAL FRAUD IS COMMITTED What methods do fraudsters use to commit their schemes? FIG. 3 How is occupational fraud committed? 89% One of the goals of the first Report to the Nation was to examine the methods by which fraudsters commit their schemes, and we have continued this line of study in every subsequent report. Over the last two decades, even with tremendous technological development and numerous changes in the global business and regulatory environments, our research shows that occupational fraud falls into several time-tested categories. The taxonomy of these categories is illustrated in the Occupational Fraud and Abuse Classification System, also known as the Fraud Tree, as depicted in Figure 4. Categories of Occupational Fraud Of the three primary categories of occupational fraud, asset misappropriations are by far the most common, occurring in 89% of the cases in our study. However, they are also the least costly, causing a median loss of USD 114,000. Corruption schemes are the next most common form of occupational fraud; 38% of the cases in our study involved some form of corrupt act. These schemes resulted in a median loss to the victim organizations of USD 250,000. The least common and most costly form of occupational fraud is financial statement fraud, which occurred in 10% of the cases and caused a median loss of USD 800,000. PERCENT OF CASES MEDIAN LOSS 38% Asset misappropriation Corruption $114,000 $250,000 10% Financial statement fraud $800, How Occupational Fraud Is Committed Report to the Nations

11 FIG. 4 Occupational Fraud and Abuse Classification System (the Fraud Tree) 6 Corruption Asset Misappropriation Financial Statement Fraud Conflicts of Interest Bribery Illegal Gratuities Economic Extortion Net Worth/ Net Income Overstatements Net Worth/ Net Income Understatements Purchasing Schemes Invoice Kickbacks Timing Differences Timing Differences Sales Schemes Bid Rigging Fictitious Revenues Understated Revenues Concealed Liabilities and Expenses Overstated Liabilities and Expenses Improper Asset Valuations Improper Asset Valuations Improper Disclosures Improper Disclosures Cash Inventory and All Other Assets Theft of Cash on Hand Theft of Cash Receipts Fraudulent Disbursements Misuse Larceny Sales Unrecorded Understated Skimming Receivables Write-Off Schemes Lapping Schemes Refunds and Other Cash Larceny Billing Schemes Shell Company Non- Accomplice Vendor Personal Purchases Payroll Schemes Ghost Employee Falsified Wages Commission Schemes Expense Reimbursement Schemes Mischaracterized Expenses Overstated Expenses Fictitious Expenses Check and Payment Tampering Forged Maker Forged Endorsement Altered Payee Register Disbursements False Voids False Refunds Asset Requisitions and Transfers False Sales and Shipping Purchasing and Receiving Unconcealed Larceny Unconcealed Multiple Reimbursements Authorized Maker 6 The definitions for many of the categories of fraud schemes in the Fraud Tree are found in the Glossary of Terminology on pg. 78. In previous reports, the category check and payment tampering was referred to simply as check tampering. However, to better reflect the increasing shift toward electronic payment methods, we have changed the category title. Report How Occupational to the Nations Fraud How Is Occupational Committed Report Fraud Is to Committed the Nations 11

12 When assessing an organization s fraud risks and designing anti-fraud controls, it is important to remember that fraudsters typically seize whatever opportunity arises when committing their schemes. Thus, many frauds including nearly one-third of the cases in our study, as illustrated in Figure 5 involve more than one form of occupational fraud. Asset Misappropriation Sub-Schemes Within the category of asset misappropriation, our research shows that there are several distinct sub-categories of schemes. The heat map in Figure 6 illustrates the relative frequency and cost of each of these scheme types. The schemes falling in the darkest area of the heat map check and payment tampering, 7 billing, and theft of noncash assets rank among the most common and the costliest scheme types and thus typically pose the greatest risk to organizations. 7 In previous reports, this category was referred to simply as check tampering. However, to better reflect the increasing shift toward electronic payment methods, we have changed the category title to check and payment tampering. FIG. 5 How often do fraudsters commit more than one type of occupational fraud? Asset misappropriation Financial statement fraud Corruption Asset misappropriation only 57% Asset misappropriation and corruption Corruption, asset misappropriation, and financial statement fraud Asset misappropriation and financial statement fraud Financial statement fraud only FIG. 6 What asset misappropriation schemes present the greatest risk? 23% Corruption only 9% Corruption and financial statement fraud 1% Register disbursements $29,000 (3%) Payroll $63,000 (7%) Check and payment tampering $150,000 (12%) Cash larceny $75,000 (11%) Skimming $50,000 (11%) Expense reimbursements $31,000 (14%) Cash on hand $20,000 (15%) 4% 3% 1% Billing $100,000 (20%) Noncash $98,000 (21%) LESS RISK MORE RISK 12 How Occupational Fraud Is Committed Report to the Nations

13 CORRUPTION Corruption represents one of the most significant fraud risks for organizations in many industries and regions. Understanding the specific factors involved in corruption schemes can help organizations effectively prevent, detect, and investigate them. Percent of cases involving corruption 40% Industries with highest proportion of WESTERN EUROPE CANADA CORRUPTION CASES: 60% 36% EASTERN EUROPE AND WESTERN/CENTRAL ASIA 30% 51% UNITED STATES 62% 49% 53% ASIA-PACIFIC MIDDLE EAST AND NORTH AFRICA 51% SOUTHERN ASIA ENERGY SUB-SAHARAN AFRICA LATIN AMERICA AND THE CARIBBEAN 49% 51% MANUFACTURING 70% of corruption cases were perpetrated by someone in a POSITION OF AUTHORITY 38% 27% EMPLOYEE 32% 3% OTHER 82% of corruption cases were committed by males MANAGER OWNER/ EXECUTIVE 50% GOVERNMENT AND PUBLIC ADMINISTRATION WHILE ONLY 18% of corruption cases were committed by females 50 % OF CORRUPTION CASES TOP RED FLAGS in corruption cases 43% 34% 23% 21% were detected by a tip Living beyond means Unusually close association with vendor/customer Financial difficulties Wheeler-dealer attitude How Occupational Fraud Is Committed Report to the Nations 13

14 Duration of Fraud Schemes FIG. 7 How does the duration of a fraud relate to median loss? 27% Examining how long frauds tend to last can also provide insight into how they affect their victims. The median duration for all of the fraud cases in our study was 16 months. However, it stands to reason that the longer a fraud goes undetected, the larger the scheme will grow. PERCENT OF CASES 19% 10% 13% 11% 5% 6% 8% Figure 7 shows that frauds that last over 60 months are more than 20 times as costly as those that are caught in the 6 months or less 7 12 months months months months months months More than 60 months first six months. Our data also indicates that fraudsters tend to start small and increase $30,000 $75,000 $125,000 their frauds rapidly over the first three years. Thus, it is incredibly important for organizations to implement proactive fraud detection MEDIAN LOSS $200,000 $400,000 $425,000 mechanisms to catch frauds quickly and minimize their $500,000 damage (see pg. 18). $715,000 CONCEALING FRAUD An act of fraud typically involves not only the commission of the scheme itself, but also efforts to conceal the misdeeds. Understanding the methods fraudsters use to cover their crimes can help organizations better design prevention mechanisms and detect the warning signs of fraud. TOP 8 CONCEALMENT METHODS USED BY FRAUDSTERS 55% 48% 42% 34% 31% 30% 29% 27% Created fraudulent physical documents Altered physical documents Created fraudulent transactions in the accounting system Altered transactions in the accounting system Altered electronic documents or files Destroyed physical documents Created fraudulent electronic documents or files Created fraudulent journal entries 14 How Occupational Fraud Is Committed Report to the Nations

15 We also examined the duration of the cases reported to us based on the type of scheme involved. Figure 8 shows the result of this analysis. The payroll schemes in our study tended to last the longest, with a median duration of 30 months, while schemes involving cash on hand and register disbursements were both typically uncovered one year after they began. FIG. 8 How long do different occupational fraud schemes last? Payroll 30 months Check and payment tampering 24 months Financial statement fraud 24 months Expense reimbursements 24 months Billing 24 months Cash larceny 24 months Corruption 22 months Skimming 18 months Noncash Cash on hand 18 months 12 months Register disbursements 12 months ONLY 3 % OF CASES DID NOT involve any attempts to conceal the fraud All of these unconcealed cases were committed by owners/ executives How to Conceal: Create, Alter, or Destroy? 80% 43% 80% Altered existing Created fraudulent evidence evidence Deleted or destroyed evidence Manager-level fraudsters are more likely to alter evidence. Owners/executives are more likely to create or delete evidence. what to Conceal: physical or electronic evidence? 21% 63% 12% ELECTRONIC EVIDENCE BOTH PHYSICAL EVIDENCE How Occupational Fraud Is Committed Report to the Nations 15

16 DETECTION How are fraud schemes initially detected? Understanding the methods by which occupational frauds are detected is critical for both investigating schemes and implementing effective prevention strategies. We asked survey participants to tell us how the frauds they investigated were initially detected, which helps us understand how organizations are most likely to discover frauds in the future. This data also shows how organizations can take steps to detect fraud proactively, rather than passively. Initial Detection of Occupational Frauds Figure 9 shows that the leading detection methods are tips, internal audit, and management review. This finding is not surprising, as these have been the three most common means of detecting occupational fraud in every edition of the report since Collectively, these three detection methods were cited in 68% of the cases in our current study. Tips were by far the most common means of detection at 40% of cases more than internal audit (15%) and management review (13%) combined. 16 Detection Report to the Nations

17 Tip Sources Since tips are the most common detection method, it is important to understand where those tips come from. Figure 10 shows that slightly more than half of all tips (53%) were provided by employees of the victim organizations. Meanwhile, nearly one-third (32%) of the tips that led to fraud detection came from people outside the organization: customers, vendors, and competitors. Active cultivation of tips and complaints, such as the promotion of fraud hotlines, is often geared primarily toward employees, but this data suggests organizations should also consider promoting reporting mechanisms to outside parties, especially customers and vendors. Additionally, 14% of tips came from an anonymous source, demonstrating that a significant portion of those who reported fraud did not want their identities known. Whistleblowers often have a fear of being identified or retaliated against, which is why it is important that they be able to make reports anonymously where such practice is legally permissible. FIG. 9 How is occupational fraud initially detected? FIG. 10 Who reports occupational fraud? Tip 40% Internal audit Management review By accident Other 15% 13% 7% 6% Employee 53% Account reconciliation Document examination External audit Surveillance/monitoring Notified by law enforcement IT controls Confession 5% 4% 4% 3% 2% 1% 1% Vendor 8% Other 5% Competitor 3% Anonymous 14% Shareholder/owner 2% Customer 21% Internal source External source Other Detection Report to the Nations 17

18 Median Loss and Duration by Detection Method In addition to determining the most common methods of detection, we also analyzed the median loss and duration of fraud schemes based on how they were uncovered. Our results indicate that there is a correlation between the way in which occupational fraud schemes are detected and the severity of the fraud. More importantly, the data points to steps organizations can take to detect fraud proactively and, in doing so, mitigate losses. Figure 11 portrays the median loss and median duration for all cases, based on the method by which they were detected. We grouped each of these detection methods into three categories: active, passive, or potentially active or passive. Active detection methods (shaded teal) involve a deliberate search for misconduct from someone within the organization or an internal control designed to detect fraud. Passive detection methods (shaded black) refer to cases in which the organization discovers the fraud by accident, confession, or unsolicited notification by another party. We classified tips and external audit as potentially active or passive detection methods because those mechanisms might or might not involve proactive efforts specifically to identify fraud, depending on the circumstances. Our findings show that median duration and median loss were relatively low in frauds that were detected by active methods. Frauds detected passively tended to last much longer and have larger median losses. For instance, frauds detected actively by IT controls tended to last five months and cause a median loss of USD 39,000, compared to schemes detected passively through notification from law enforcement, which tended to last two years and cause a median loss of almost USD 1 million. The key takeaway from this data is that organizations can reduce the impact of fraud by pursuing internal controls and policies that actively detect fraud, such as thorough management review, account reconciliation, and surveillance/monitoring. Organizations that do not actively seek out fraud are likely to experience schemes that continue for much longer and at a higher cost. FIG. 11 How does detection method relate to fraud duration and loss? MEDIAN MONTHS TO DETECTION IT controls Active detection method Potentially active or passive detection method Passive detection method $50,000 $39,000 6 months 5 months Surveillance/monitoring $52, months Account reconciliation $110,000 $108, months 12 months Internal audit Management review $130, months Document examination $126, months Tip $150,000 $250, months 23 months External audit By accident $186, months Confession $935, months Notified by police 18 Detection Report to the Nations

19 HOTLINES AND REPORTING MECHANISMS The presence of a hotline or other reporting mechanism affects how organizations detect fraud and the outcome of the case. 63 % of victim organizations had hotlines 46% OF CASES DETECTED BY TIP HOTLINES 30% OF CASES DETECTED BY TIP NO HOTLINES Organizations with hotlines detected fraud by tip more often Fraud losses were 50% SMALLER at organizations with hotlines than those without $100,000 $200,000 LOREM IPSUM DOLOR SIT Organizations without hotlines were more than TWICE AS LIKELY to detect fraud by accident or by external audit Corruption is particularly likely to be detected by tip Corruption Asset Misappropriation Financial Statement Fraud 50% 38% 38% DETECTED BY TIP DETECTED BY TIP DETECTED BY TIP Telephone hotlines are most popular, but whistleblowers use various reporting mechanisms Telephone hotline Mailed letter/form 42% 26% 23% Other Web-based/ online form Fax 16% 9% 1% NOT ALL TIPS COME THROUGH HOTLINES When a reporting mechanism is not used, whistleblowers are most likely to report to: DIRECT SUPERVISOR 32% EXECUTIVE 15% FRAUD INVESTIGATION TEAM 13% COWORKER 12% INTERNAL AUDIT 10% Detection Report to the Nations 19

20 VICTIM ORGANIZATIONS How are different kinds of organizations affected by occupational fraud? To better understand the victim organizations in our study, we asked participants to provide information about the organizations type, size, and industry, as well as the mechanisms that the organizations had in place to prevent and detect fraud at the time the scheme occurred. Type of Organization As shown in Figure 12, more than 70% of the frauds in our study occurred at for-profit organizations, with 42% of the victim organizations being private companies and 29% being public companies. The private companies in our study suffered the greatest median loss, at USD 164,000. Not-for-profit organizations were the victim in only 9% of frauds and had the smallest median loss of USD 75,000; however, for many not-for-profit entities, financial resources are extremely limited and a loss of USD 75,000 can be particularly devastating. Level of Government Organization Resources and operations vary greatly by level of government, meaning that fraud can affect these organizations differently. Consequently, we broke down the government fraud cases in our study based on the level of government agency involved. While there was not a large variation in the percentage of schemes that occurred at local, state/ provincial, and national levels, the frauds at national-level agencies tended to be much larger, causing a median loss approximately twice as large as the losses experienced by local and state/provincial governments (see Figure 13). FIG. 12 What types of organizations are victimized by occupational fraud? PERCENT OF CASES MEDIAN LOSS 42% Private company $164,000 29% Public company FIG. 13 What levels of government are victimized by occupational fraud? F 16% Government $117,000 $118,000 9% Not-for-profit $75,000 National: 38% ($200,000*) State/provincial: 26% ($110,000*) *Dollar amounts are median loss. 4% Other $120,000 Local: 31% ($92,000*) Other: 4% ($58,000*) 20 Victim Organizations Report to the Nations

21 Size of Organization The size of an organization s staff can directly affect both the opportunity for fraud and the ability to enact certain anti-fraud mechanisms. Larger entities typically have more resources to invest in their anti-fraud programs, as well as a greater ability to separate duties among staff members to help prevent fraud; however, the large staff size can also mean more potentially dishonest employees who might attempt schemes and more complex processes and transactions, which can increase the risk of fraud. To provide some insight into the relative risks of fraud for organizations of various sizes, we analyzed the cases reported to us based on the number of employees at the victim organization. Figure 14 shows that small organizations (those with fewer than 100 employees) both experienced the greatest percentage of cases in our study (28%) and suffered the largest median loss (USD 200,000). See Fraud in Small Businesses on pgs for more information about how fraud affects these organizations. FIG. 14 How does an organization s size relate to its occupational fraud risk? 28% 22% 26% 24% PERCENT OF CASES <100 employees employees 1,000 9,999 employees 10,000+ employees MEDIAN LOSS $100,000 $100,000 $132,000 $200,000 21

22 FRAUD IN SMALL BUSINESSES Fraud can be especially devastating to small businesses. These organizations typically have fewer resources to both prevent and recover from a fraud, and they often require an increased level of trust in employees due to a lower ability to implement robust anti-fraud controls. SMALL BUSINESSES LOSE ALMOST TWICE AS MUCH PER SCHEME TO OCCUPATIONAL FRAUD Median loss: <100 EMPLOYEES 100+ EMPLOYEES Median loss: $200,000 $104,000 Frauds detected by tip: Frauds caused by lack of internal controls: 29% 44% 42% 25% Frauds perpetrated by an owner/executive: 29% 16% 22 Victim Organizations Report to the Nations

23 Corruption Billing Check and payment tampering Expense reimbursements Skimming Cash on hand Noncash Financial statement fraud Cash larceny Payroll Register disbursements 3% 2% 5% 7% 8% 8% 9% 11% 13% 14% 14% 16% 16% 18% Small businesses face DIFFERENT RISKS than larger organizations 0% 10% 20% 30% 40% 20% 20% 21% 22% 22% PERCENT OF CASES 29% 32% <100 Employees 100+ Employees 43% Small businesses typically have fewer anti-fraud Controls than larger organizations, leaving them more vulnerable to fraud 100+ Employees 100% 80% 60% 40% Formal fraud risk assessments Fraud training for employees Surprise audits Fraud training for managers/executives Proactive data monitoring/analysis Rewards for whistleblowers Job rotation/mandatory vacation Dedicated fraud department, function, or team Anti-fraud policy Employee support programs Hotline Independent audit committee Internal audit department Management certification of financial statements Management review Code of conduct External audit of financial statements External audit of internal controls over financial reporting <100 Employees 20% 0% Victim Organizations Report to the Nations 23

24 R+95 R+98 R+99 R+96 R+96 R+99 R+98 R+90 R+96 R+97 R+96 R+99 R+91 R+98 R+96 R+97 R+93 R+99 R+99 R+95 R+96 R+97 R+99 Industry of Organization In addition, we examined the cases reported to us based on the industry of the victim organization. The greatest number of cases in our study occurred in the banking and financial services, manufacturing, and government and public administration sectors. Readers should note that this data likely represents the industries that most often employ CFEs, rather than the industries that are most susceptible to fraud. However, information about occupational fraud in various industries can be useful for benchmarking purposes. FIG. 15 How does occupational fraud affect organizations in different industries? R Cases % 14% Banking and financial services MEDIAN LOSS: $110,000 Cases Manufacturing MEDIAN LOSS: $240,000 Cases Government and public administration MEDIAN LOSS: $125,000 Cases Health care MEDIAN LOSS: $100,000 Cases Retail MEDIAN LOSS: $50, Cases Food service and hospitality Services (professional) 2+ Cases Arts, entertainment, and recreation MEDIAN LOSS: $88,000 Cases Insurance MEDIAN LOSS: $153,000 Education MEDIAN LOSS: $68,000 Energy MEDIAN LOSS: $300, Cases Telecommunications Real estate MEDIAN LOSS: $180,000 Utilities Services (Other) Cases Mining Cases Cases Communications and publishing Cases Construction MEDIAN LOSS: $227,000 Other MEDIAN LOSS: $70,000 Transportation and warehousing MEDIAN LOSS: $140,000 MEDIAN LOSS: $90, Cases Cases Cases Technology MEDIAN LOSS: $150,000 Wholesale trade Cases Religious, charitable, or social services MEDIAN LOSS: $90,000 Cases MEDIAN LOSS: $258,000 MEDIAN LOSS: $100,000 Cases Cases Cases Agriculture, forestry, fishing, and hunting MEDIAN LOSS: $136,000 Cases MEDIAN LOSS: $150,000 MEDIAN LOSS: $82,000 MEDIAN LOSS: $208,000 Cases MEDIAN LOSS: $525,000 Cases MEDIAN LOSS: $110, Victim Organizations Report to the Nations

25 Most Common Schemes by Industry Understanding the frequency of specific fraud schemes within different industries can help organizations assess and design controls to guard against the schemes that pose the most significant threats. Figure 16 provides a heat map showing the relevant risk for each category of occupational fraud in every industry that had at least 50 reported cases in our study. Boxes are shaded from light to dark red based on the respective level of occurrence, with darker boxes indicating higher-frequency schemes. FIG. 16 What are the most common occupational fraud schemes in various industries? INDUSTRY Banking and financial services Cases Billing Cash larceny Cash on hand Check and payment tampering Corruption % 14% 23% 12% 36% 7% 8% 11% 2% 3% 9% Expense reimbursements Financial statement fraud Noncash Payroll Register disbursements Skimming Manufacturing % 8% 15% 12% 51% 18% 10% 28% 5% 3% 7% Government and public administration % 11% 11% 9% 50% 11% 5% 22% 7% 2% 11% Health care % 7% 13% 13% 36% 16% 11% 19% 17% 1% 12% Retail % 10% 19% 9% 28% 8% 12% 34% 5% 13% 13% Education 96 23% 19% 19% 6% 38% 18% 6% 19% 6% 0% 14% Insurance 87 20% 9% 3% 18% 45% 8% 7% 11% 3% 1% 11% Energy 86 20% 2% 10% 12% 53% 10% 3% 27% 7% 2% 10% Construction 83 37% 12% 8% 19% 42% 23% 16% 23% 14% 1% 13% Transportation and warehousing Food service and hospitality 79 25% 8% 8% 9% 46% 15% 8% 28% 3% 3% 13% 75 17% 16% 20% 11% 29% 12% 12% 24% 7% 0% 23% Technology 62 26% 5% 10% 8% 42% 21% 16% 32% 8% 0% 6% Religious, charitable, or social services 58 40% 9% 22% 19% 34% 29% 10% 19% 22% 3% 17% Services (professional) 54 26% 17% 15% 26% 17% 30% 13% 13% 15% 0% 15% Arts, entertainment, and recreation 50 14% 20% 36% 6% 32% 12% 8% 18% 4% 8% 28% LESS RISK MORE RISK Victim Organizations Report to the Nations 25

26 As noted in Figure 16 on pg. 25, corruption poses a significant risk to several industries, with the most common occurrence of corruption schemes in the energy, manufacturing, and government and public administration sectors. Skimming schemes were also notably more common in the arts, entertainment, and recreation and the food service and hospitality industries than elsewhere, while payroll schemes occurred more frequently in the religious, charitable, or social services and the health care sectors. Interestingly, the cases that occurred in religious, charitable, or social services organizations also tended to involve the most crossover between scheme types, meaning the perpetrators in these cases used many different schemes to defraud the victims, rather than limiting their frauds to one specific area. Anti-Fraud Controls at the Victim Organization The presence of a robust system of anti-fraud controls can be a powerful deterrent, as well as a proactive prevention and detection mechanism, in the fight against fraud. Thus, organizations can benefit from knowing which anti-fraud controls are commonly used by their peers, as well as which tend to be the most effective. To help explore this information, we provided survey respondents with a list of 18 entity-level, anti-fraud controls and asked which, if any, were present at the victim organization at the time the fraud occurred. As noted in Figure 17, 80% of the organizations had a code of conduct and underwent external financial statement audits, while 73% had internal audit departments, and 72% had company management certify the financial statements. On the other end of the spectrum, 19% of organizations had policies requiring job rotation or mandatory vacation, and only 12% provided rewards for whistleblowers. Effectiveness of Anti-Fraud Controls Demonstrating the return on investment in anti-fraud initiatives can be a difficult task, as it is nearly impossible to measure the amount of fraud prevented by a specific control. However, many anti-fraud professionals find themselves needing to make a business case to justify additional fraud prevention and detection initiatives. To provide some visibility into the relative effectiveness of various anti-fraud controls, we compared the losses experienced by the victim organizations that had specific controls in place against the losses experienced by those that had not implemented each control. The results of this analysis are provided in Figure 18 on pg. 28. Interestingly, the presence of every control we analyzed was correlated with lower fraud losses. For example, the use of proactive data monitoring and analysis and surprise audits was associated with a more than 50% reduction in fraud losses. We similarly analyzed the duration of fraud schemes based on the presence or absence of each anti-fraud control (see Figure 19 on pg. 29). Data monitoring and analysis and surprise audits were correlated with the most significant reductions in fraud duration; as these two controls were also associated with some of the largest loss reductions, our data indicates that they are among the most useful tools in the fight against fraud. 26 Victim Organizations Report to the Nations

27 FIG. 17 What anti-fraud controls are most common? Code of conduct 80% External audit of financial statements Internal audit department 80% 73% Management certification of financial statements External audit of internal controls over financial reporting Management review 72% 67% 66% Hotline Independent audit committee 63% 61% Employee support programs 54% Anti-fraud policy 54% Fraud training for employees Fraud training for managers/executives 53% 52% Dedicated fraud department, function, or team 41% Formal fraud risk assessments 41% Surprise audits Proactive data monitoring/analysis 37% 37% Job rotation/mandatory vacation 19% Rewards for whistleblowers 12% Victim Organizations Report to the Nations 27

28 FIG. 18 How does the presence of anti-fraud controls relate to median loss? $250,000 $200,000 $150,000 $100,000 12% 20% 23% 29% 33% 35% 38% 38% 41% 43% 46% 47% 50% 50% 50% 51% 52% 56% PERCENT REDUCTION Median loss without controls Median loss with controls $50,000 0 Formal fraud risk assessments Employee support programs Fraud training for managers/executives Dedicated fraud department, function, or team External audit of financial statements Job rotation/mandatory vacation Independent audit committee Rewards for whistleblowers Fraud training for employees Code of conduct Proactive data monitoring/analysis Surprise audits External audit of internal controls over financial reporting Management review Hotline Anti-fraud policy Internal audit department Management certification of financial statements Control Percent of cases Control in place Control not in place Percent reduction Code of conduct 80% $ 110,000 $ 250,000 56% Proactive data monitoring/analysis 37% $ 80,000 $ 165,000 52% Surprise audits 37% $ 75,000 $ 152,000 51% External audit of internal controls over financial reporting 67% $100,000 $200,000 50% Management review 66% $100,000 $200,000 50% Hotline 63% $100,000 $200,000 50% Anti-fraud policy 54% $100,000 $ 190,000 47% Internal audit department 73% $108,000 $200,000 46% Management certification of financial statements 72% $ 109,000 $ 192,000 43% Fraud training for employees 53% $100,000 $ 169,000 41% Formal fraud risk assessments 41% $100,000 $ 162,000 38% Employee support programs 54% $100,000 $ 160,000 38% Fraud training for managers/executives 52% $100,000 $ 153,000 35% Dedicated fraud department, function, or team 41% $100,000 $ 150,000 33% External audit of financial statements 80% $ 120,000 $ 170,000 29% Job rotation/mandatory vacation 19% $100,000 $ 130,000 23% Independent audit committee 61% $ 120,000 $ 150,000 20% Rewards for whistleblowers 12% $ 110,000 $ 125,000 12% 28 Victim Organizations Report to the Nations

29 FIG. 19 How does the presence of anti-fraud controls relate to the duration of fraud? MEDIAN MONTHS TO DETECTION % % 40% 44% 46% 48% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 54% 58% PERCENT REDUCTION Median duration without controls Median duration with controls 5 Proactive data monitoring/analysis Surprise audits Internal audit department Management certification of financial statements External audit of internal controls over financial reporting Management review Hotline Anti-fraud policy Fraud training for employees Fraud training for managers/executives Formal fraud risk assessments 0 Rewards for whistleblowers Independent audit committee Code of conduct Job rotation/mandatory vacation Dedicated fraud department, function, or team External audit of financial statements Employee support programs Control Percent of cases Control in place Control not in place Percent reduction Proactive data monitoring/analysis 37% 10 months 24 months 58% Surprise audits 37% 11 months 24 months 54% Internal audit department 73% 12 months 24 months 50% Management certification of financial statements 72% 12 months 24 months 50% External audit of internal controls over financial reporting 67% 12 months 24 months 50% Management review 66% 12 months 24 months 50% Hotline 63% 12 months 24 months 50% Anti-fraud policy 54% 12 months 24 months 50% Fraud training for employees 53% 12 months 24 months 50% Fraud training for managers/executives 52% 12 months 24 months 50% Formal fraud risk assessments 41% 12 months 24 months 50% Rewards for whistleblowers 12% 9 months 18 months 50% Independent audit committee 61% 12 months 23 months 48% Code of conduct 80% 13 months 24 months 46% Job rotation/mandatory vacation 19% 10 months 18 months 44% Dedicated fraud department, function, or team 41% 12 months 20 months 40% External audit of financial statements 80% 15 months 24 months 38% Employee support programs 54% 12 months 18 months 33% Victim Organizations Report to the Nations 29

30 Background Checks Effectively preventing fraud begins with ensuring that the organization hires ethical employees. As part of our study, we examined whether the victim organizations ran a background check on the perpetrator prior to hiring him or her, as well as whether the background check revealed any potential indicators of the employee s dishonesty. As noted in Figure 20, 52% of the organizations ran background checks, while 48% did not. Of the organizations that did run a check before hiring the perpetrator, 10% were alerted to a red flag regarding the perpetrator but chose to hire the person anyway. FIG. 20 Was a background check run on the perpetrator prior to hiring? No 48% Yes 52% FIG. 21 What types of background checks were run on the perpetrator prior to hiring? No Did the check reveal existing red flags? Yes 10% 90% We also asked about the types of background checks used by the victim organizations in our study. Figure 21 shows that these organizations were most likely to look into the individual s employment and criminal history, with three-quarters or more of the background checks covering these areas. Employment history Criminal checks Reference checks Education verification Credit checks Other 78% 75% 55% 50% 36% 4% 30 Victim Organizations Report to the Nations

31 Internal Control Weaknesses that Contributed to Fraud Understanding the factors that can lead to fraud is the foundation of preventing future occurrences. Consequently, we asked survey respondents what they perceived to be the primary internal control weakness that contributed to the fraud they reported. In 30% of cases, a simple lack of controls was the main factor that enabled the fraud to occur, while another 19% of cases occurred because the perpetrator was able to override the controls that had been put in place. FIG. 22 What are the primary internal control weaknesses that contribute to occupational fraud? Lack of internal controls 30% Override of existing controls 19% Lack of management review 18% Poor tone at the top 10% Lack of independent checks/audits 4% Lack of employee fraud education 2% Lack of competent personnel in oversight roles 8% Other 6% Lack of clear lines of authority 2% Lack of reporting mechanism <1 % Victim Organizations Report to the Nations 31

32 We also analyzed these control weaknesses based on the category of fraud involved in the scheme (see Figure 23). Not surprisingly, a poor tone at the top was much more likely to be the primary factor in financial statement fraud and corruption cases than in asset misappropriation cases. However, it is interesting to note that a lack of internal controls is more common in asset misappropriation and financial statement frauds, while corruption schemes are more likely than other schemes to involve an override of existing controls. In addition, a lack of management review is more commonly the reason for asset misappropriation schemes than other forms of fraud. FIG. 23 How do internal control weaknesses vary by scheme type? Lack of internal controls Lack of management review Override of existing internal controls Poor tone at the top Lack of competent personnel in oversight roles Other Lack of independent checks/audits Lack of employee fraud education Lack of clear lines of authority Lack of reporting mechanism 32% 25% 29% 19% 15% 15% 18% 21% 14% 9% 18% 23% 8% 6% 5% 5% 7% 8% 4% 3% 5% 2% 3% <1% 2% 2% 0% <1% 1% 1% Asset misappropriation Corruption Financial statement fraud 32 Victim Organizations Report to the Nations

33 PERPETRATORS What does a typical fraudster look like? We asked survey respondents to provide a broad range of information about the fraud perpetrators they investigated, including the offenders conditions of employment, basic demographics, prior misconduct, and behavior that might have been warning signs of fraudulent activity. Our goal is to identify common characteristics and risk profiles for those who commit occupational fraud, which can help organizations better recognize fraud perpetrators or those at risk for engaging in fraudulent activity. Perpetrator s Position As seen in Figure 24, there is a strong correlation between the fraud perpetrator s level of authority and the size of the fraud. While owners/executives only committed 19% of the frauds in our study, the schemes committed by these individuals resulted in a median loss of USD 850,000, which was nearly six times larger than the median loss caused by managers, and 17 times larger than the median loss caused by low-level employees. A significant correlation between authority and fraud loss has been found in every edition of the report dating back to This correlation likely reflects the fact that high-level fraudsters tend to have greater access to an organization s assets than low-level personnel. They may also have greater technical ability to commit and conceal fraud, and they might be able to use their authority to override or conceal their crimes in ways that low-level employees cannot. FIG. 24 How does the perpetrator s level of authority relate to occupational fraud? PERCENT OF CASES MEDIAN LOSS 44% $50,000 34% $150,000 19% Employee Manager Owner/executive Other $850,000 3% $189,000 Perpetrators Report to the Nations 33

34 One reason frauds committed by high-level perpetrators are more costly could be that their schemes tend to last longer. The median duration of a scheme committed by an owner/executive was 24 months, compared to 18 months for schemes committed by managers and 12 months for those committed by employees (See Figure 7 on pg. 14 for more information on the correlation between fraud duration and median loss.). FIG. 25 How does the perpetrator s level of authority relate to scheme duration? Position Employee Manager Owner/executive Median months to detection 12 months 18 months 24 months Perpetrator s Tenure As Figure 26 shows, fraud losses tend to increase based on how long the fraud perpetrator worked for the victim organization. Perpetrators with less than one year of tenure caused a median loss of USD 40,000, while those with more than ten years experience at the victim organization caused a median loss of USD 241,000, more than six times as high. FRAUD COMMITTED BY OWNERS AND EXECUTIVES Occupational frauds committed by owners/executives tend to be extremely costly. How do these cases differ from non-owner/executive frauds? MEDIAN LOSS $850,000 OWNERS/EXECUTIVES 65% of owner/executive frauds involved corruption 27% of owner/executive frauds involved financial statement fraud $100,000 NON-OWNERS/ EXECUTIVES 34% Non-ownerS/executives 6% Non-ownerS/executives Corruption and financial statement fraud are the two costliest forms of occupational fraud 34 Perpetrators Report to the Nations

35 FIG. 26 How does the perpetrator s tenure relate to occupational fraud? 9% Less than 1 year $40,000 44% 1 5 years $100,000 23% 6 10 years $173,000 24% More than 10 years $241,000 PERCENT OF CASES MEDIAN LOSS Owners/executives are more likely to collude with others Collusion schemes tend to be more costly than single-perpetrator frauds 66% of cases involved owners/executives non-owners/executives 45% of cases involved collusion collusion Owners/executives engaged in non-fraud-related misconduct more often owners/executives non-owners/executives 41% of cases involved nonfraud-related misconduct 62% of cases involved nonfraud-related misconduct bullying or intimidation was most common, observed in 41% of owner/executive cases Frauds detected by a third-party auditor or law enforcement: Owner/executive 1 in 8 Non-owner/executive 1 in 25 Frauds that are not detected internally tend to be much more costly Perpetrators Report to the Nations 35

36 One possible explanation for the correlation between tenure and fraud loss might be that employees who have been with an organization for long periods of time are often promoted to positions of greater authority. As seen in Figure 24 on pg. 33, there is a strong correlation between authority and fraud loss. To test this explanation, we separated all fraud offenders into two groups: those who had been with their organizations five years or fewer, and those who had been with their organizations six years or more. We then compared the median loss for these two groups across similar levels of authority. Interestingly, at every level, the more tenured fraudsters caused significantly larger losses than their less tenured counterparts. This indicates that the correlation between tenure and fraud loss to some extent operates independently from the offender s level of authority. We believe it is likely that those with longer tenure at a victim organization tend to have a better understanding of the organization s controls and processes including gaps or weaknesses in those processes which may enable them to do a better job of committing and concealing fraud. In a sense, these perpetrators are learning from experience how to steal from their employers. FIG. 27 How does the perpetrator s tenure relate to median loss at different levels of authority? Employee $100,000 6 years or more $35,000 5 years or less Manager $125,000 $200,000 Owner/executive $1,000,000 $672,000 MEDIAN LOSS Perpetrator s Department Figure 28 shows the frequency and median loss in fraud cases based on where the fraudster worked within the victim organization. This heat map provides a visual representation of the relative fraud risks posed by various departments. For example, we can see that accounting and operations were each responsible for 14% of the frauds in our study, but the median loss caused by those in the accounting department (USD 212,000) was significantly larger than the median loss from operations (USD 88,000). Frauds committed by those in executive or upper-management roles were slightly less common, but much costlier. 36 Perpetrators Report to the Nations

37 FIG. 28 What departments pose the greatest risk for occupational fraud? Executive/upper management $729,000 11% $250,000 Information technology $200,000 Manufacturing and production Warehousing/inventory Accounting $150,000 Facilities and maintenance Purchasing Finance $100,000 Marketing/public relations Human resources Other Administrative support Sales Operations $50,000 Customer service $0 0% 2% 4% 6% 8% 10% 12% 14% 16% LESS RISK MORE RISK Department* Percent of cases Median loss Accounting 14% $ 212,000 Operations 14% $ 88,000 Sales 12% $ 90,000 Executive/upper management 11% $ 729,000 Customer service 8% $ 26,000 Administrative support 8% $ 91,000 Other 6% $ 77,000 Finance 6% $ 156,000 Purchasing 5% $ 163,000 Facilities and maintenance 3% $ 175,000 Warehousing/inventory 3% $ 200,000 Information technology 3% $ 225,000 Marketing/public relations 2% $ 80,000 Manufacturing and production 2% $ 200,000 Human resources 1% $ 76,000 *Departments with fewer than ten cases were omitted. Perpetrators Report to the Nations 37

38 Schemes Based on Perpetrator s Department Overall, 77% of the occupational frauds in our study came from eight departments: accounting, operations, sales, executive/upper management, customer service, administrative support, finance, and purchasing. Figure 29 shows the relative frequency of various fraud schemes in each of those departments. Boxes are shaded from light to dark red based on the frequency for each particular scheme, with darker boxes indicating higher levels of risk. This data should be useful for organizations to assess risk and develop effective anti-fraud controls in the departments most likely to be occupational fraud hotspots. FIG. 29 What are the most common occupational fraud schemes in high-risk departments? INDUSTRY Cases Billing Cash larceny Cash on hand Check and payment tampering Corruption Expense reimbursements Financial statement fraud Noncash Payroll Register disbursements Skimming Accounting % 14% 17% 30% 23% 12% 13% 7% 14% 2% 19% Operations % 8% 15% 8% 36% 11% 4% 20% 5% 2% 11% Executive/upper management % 14% 16% 15% 62% 29% 30% 20% 12% 3% 9% Sales % 12% 12% 6% 34% 13% 6% 25% 2% 5% 14% Customer service 155 5% 16% 31% 8% 19% 4% 1% 15% 3% 5% 14% Administrative support % 7% 21% 14% 26% 22% 8% 19% 13% 3% 14% Finance % 15% 21% 16% 37% 13% 16% 15% 6% 2% 10% Purchasing 94 18% 5% 6% 5% 77% 10% 3% 31% 3% 2% 4% LESS RISK MORE RISK 38 Perpetrators Report to the Nations

39 Perpetrator s Gender Figure 30 shows that a sizeable majority of the fraudsters in our study (69%) were males. Men also caused much larger median losses (USD 156,000) than females (USD 89,000). This is consistent with our past studies, which have all shown males to be responsible for between 65% and 70% of frauds along with a significant disparity in fraud loss. Perpetrator s Gender Based on Region The gender distribution of occupational fraudsters varies significantly by region. As seen in Figure 31, in the United States men accounted for 58% of all occupational frauds, whereas in the Middle East and North Africa this figure was 92%. FIG. 30 How does the perpetrator s gender relate to occupational fraud? PERCENT OF CASES 69% Male 31% Female MEDIAN LOSS $89,000 FIG. 31 How does the gender distribution of perpetrators vary by region? $156,000 Canada 69% 58% United States 31% 42% Western Europe 92% Middle East and North Africa 77% 8% 23% 88% 84% 12% 16% Southern Asia Eastern Europe and Western/Central Asia Latin American and the Caribbean 79% 21% 76% 24% Sub-Saharan Africa 73% 27% Asia-Pacific Male Female Perpetrators Report to the Nations 39

40 Position of Perpetrator Based on Gender One possible reason that fraud losses caused by men are larger than those caused by women could be related to levels of authority. As shown in Figure 24 on pg. 33, fraudsters with high levels of authority (e.g., executives and owners) tend to cause much larger losses than those with low authority (e.g., rankand-file employees). FIG. 32 How does gender distribution and median loss vary based on the perpetrator s level of authority? 86% PERCENT OF CASES 58% 42% 73% 27% 14% Figure 32 shows that the proportion of male fraudsters rises with the perpetrators level of Employee Manager Owner/executive authority. At the employee level, only 58% of fraudsters were male, but that number increased to 73% for managers and 86% $50,000 $50,000 $165,000 $128,000 for owners/executives. Given that there were far more men than women in higher levels of authority in our dataset, we would expect the median loss for males to be larger. MEDIAN LOSS $295,000 But interestingly, even when we account for authority level, males still tend to cause significantly larger losses than females in managerial and owner/executive roles. Male Male Female $1,000,000 owners/executives caused a median loss of USD 1 million, as opposed to a median loss of USD 295,000 caused by female owners/executives. Among managers there was also a gender discrepancy in median loss, although not nearly as large. At the employee level, male and female median losses were equal. 40 Perpetrators Report to the Nations

41 Perpetrator s Age The age distribution of occupational fraudsters is roughly bell-shaped, as seen in Figure 33. Losses, however, tend to rise with the age of the fraudster. The largest median losses in our study were caused by fraudsters in the oldest age ranges (56 and older), while those who were 30 or younger caused a much smaller amount of damage. FIG. 33 How does the perpetrator s age relate to occupational fraud? PERCENT OF CASES 19% 19% 15% 14% 10% 9% 6% 5% 3% < >60 $23,000 $40,000 $100,000 $100,000 MEDIAN LOSS $200,000 $250,000 $237,000 $355,000 $480,000 Perpetrator s Education Level Figure 34 shows there is also a correlation between the fraudster s education level and the size of the fraud. Those with a postgraduate degree caused a median loss of USD 230,000 and those with a university degree caused a median loss of USD 160,000. Both of these figures were much higher than the median loss of schemes by fraudsters with a high school degree or less. This data might indicate that highly educated fraudsters have superior technical abilities or knowledge that make them more effective at committing fraud, but it is also probably influenced by the fraudster s position of authority. More highly educated individuals tend to occupy higher positions within an organization. For example, in our study approximately 68% of those with a university or postgraduate degree were either managers or owners/executives. FIG. 34 How does the perpetrator s education level relate to occupational fraud? PERCENT OF CASES High school Some graduate or less university MEDIAN LOSS 24% $75,000 15% $130,000 47% University degree $160,000 14% Postgraduate degree $230,000 Perpetrators Report to the Nations 41

42 Collusion by Multiple Perpetrators Approximately half of the cases in our study involved multiple perpetrators who colluded with one another to commit fraud. As Figure 35 illustrates, fraud losses rose significantly when more than one fraudster was involved in a scheme. One likely explanation for this finding is that many anti-fraud controls work on the principles of separation of duties and independent checks. When multiple perpetrators conspire in a fraud scheme, they can circumvent the system of independent verification that might otherwise detect fraud. FIG. 35 How does the number of perpetrators in a scheme relate to occupational fraud? 52% of cases 19% of cases 30% of cases ONE PERPETRATOR $74,000 TWO PERPETRATORS THREE OR MORE PERPETRATORS Median loss $150,000 Median loss $339,000 Median loss Perpetrator s Criminal Background The vast majority of occupational fraudsters have no prior history of criminal fraud convictions. Only 4% of the perpetrators in our 2018 study had previously been convicted of a fraud-related offense, which is consistent with our findings in every study dating back to This suggests that most occupational fraudsters are first-time offenders. However, according to Figure 43 on pg. 49, between 58% and 69% of occupational fraud cases in our past studies were never referred to law enforcement, which indicates that the actual number of repeat offenders is probably higher than what can be identified through conviction records. FIG. 36 Do perpetrators tend to have prior fraud convictions? Never charged or convicted (89%) Charged but not convicted (6%) Had prior convictions (4%) Other (1%) 42 Perpetrators Report to the Nations

43 Perpetrator s Employment History Figure 37 shows that 85% of occupational fraud perpetrators had never been punished or terminated for fraud-related conduct prior to the crimes in this study. This also tends to indicate that most occupational fraudsters are first-time offenders, but as with criminal conviction data discussed earlier, this data might understate the real number of repeat offenders. According to Figure 41 on pg. 47, 28% of fraudsters in our study either received no punishment from their employers, were permitted to resign, or entered into private settlement agreements (which are typically confidential). Therefore, the true number of repeat offenders may be higher than what is indicated by employment background checks. FIG. 37 Do perpetrators tend to have prior employment-related disciplinary actions for fraud? Behavioral Red Flags Displayed by Perpetrators Individuals who are engaged in occupational fraud schemes often exhibit certain behavioral traits or warning signs associated with their illegal activity. We presented survey respondents with a list of 17 common behavioral red flags and asked them to tell us which, if any, of these red flags had been displayed by the perpetrator before the fraud was discovered. Figure 38 on pg. 45 shows the frequency of behavioral red flags in our 2018 cases. The six most common behavioral indicators of occupational fraud were: (1) living beyond means; (2) financial difficulties; (3) unusually close association with a vendor or customer; (4) excessive control issues or unwillingness to share duties; (5) recent divorce or family problems; and (6) a general wheeler-dealer attitude involving shrewd or unscrupulous behavior. These six red flags have been the six most common behavioral indicators in every report since we began tracking this data in (See The Red Flags of Fraud on pg. 44.) Never punished or terminated (85%) Previously terminated (9%) Previously punished (6%) Other (1%) Perpetrators Report to the Nations 43

44 THE RED FLAGS OF FRAUD Understanding and recognizing the behavioral red flags displayed by fraud perpetrators can help organizations detect fraud and mitigate losses. IN 85% fraudsters displayed at least OF CASES one behavioral red flag 50% OF CASES These AND IN they exhibited multiple red flags behavioral red flags have been the most common in every one of our studies dating back to 2008, with a remarkably consistent distribution Living beyond means Financial difficulties Unusually close association with vendor/customer Control issues, unwillingness to share duties Divorce/ family problems Wheeler-dealer attitude % 10% 20% 30% 40% OWNER/ EXECUTIVE Red flags varied by PERPETRATOR S POSITION EMPLOYEE Red flags varied by PERPETRATOR S GENDER 24% Unusually close association with vendor/customer 16% 24% Financial difficulties 39% 21% Control issues, unwillingness to share duties 8% 11% Divorce/family problems 20% 22% Wheeler-dealer attitude 9% 2% Instability in life circumstances 6% 18% Irritability, suspiciousness, or defensiveness 10% 24% Unusually close association with vendor/customer 11% 23% Financial difficulties 35% 16% Wheeler-dealer attitude 6% 4% Complained about inadequate pay 11% 8% Excessive pressure from within the organization 3% 44 Perpetrators Report to the Nations

45 FIG. 38 How often do perpetrators exhibit behavioral red flags? Living beyond means Financial difficulties Unusually close association with vendor/customer No behavioral red flags Control issues, unwillingness to share duties Divorce/family problems Wheeler-dealer attitude Irritability, suspiciousness, or defensiveness Addiction problems Complained about inadequate pay Excessive pressure from within organization Social isolation Past legal problems Refusal to take vacations Past employment-related problems Complained about lack of authority Excessive family/peer pressure for success Other Instability in life circumstances 41% 29% 20% 15% 15% 14% 13% 12% 10% 9% 7% 7% 6% 6% 6% 5% 4% 4% 3% 45

46 Non-Fraud-Related Misconduct by Perpetrators We presented survey respondents with a list of common non-fraud workplace violations and asked them to identify any that the fraudster had been engaged in prior to or during the time of the fraud. As Figure 39 shows, 45% of fraud offenders had committed some form of non-fraud workplace violation, which could potentially indicate a link between occupational fraud and other forms of workplace misconduct. The most common non-fraud violation was bullying or intimidation, which was observed in 21% of all cases. Human Resources-Related Red Flags In some circumstances, negative events surrounding a person s conditions of employment (such as poor performance evaluations, loss of pay or benefits, fear of job loss, etc.) can cause financial stress or resentment toward the employer, which might play a role in the decision to commit fraud. We refer to these events as human resources-related red flags. As Figure 40 shows, 39% of fraudsters had experienced some form of HR-related red flags prior to or during the time of their frauds. The most common of these were negative performance evaluations (14% of cases) and fear of job loss (13%). FIG. 39 Do fraud perpetrators also engage in non-fraud-related misconduct? FIG. 40 Do fraud perpetrators experience negative HR-related issues prior to or during their frauds? Yes 45% No 55% Yes 39% No 61% Bullying or intimidation (21%) Poor performance evaluations (14%) Excessive absenteeism (14%) Excessive tardiness (10%) Fear of job loss (13%) Actual job loss (5%) Cut in benefits (4%) Excessive Internet browsing (7%) Sexual harassment (4%) Visiting inappropriate websites (4%) Other (4%) Cut in pay (3%) Demotion (3%) Other (4%) Involuntary cut in hours (3%) 46 Perpetrators Report to the Nations

47 CASE RESULTS How do organizations react after a fraud has been discovered? We asked our respondents about what happened after the fraud was determined to have occurred. This data is valuable for developing expectations about the remedies that are available to organizations, as well as evaluating the common punitive actions taken against fraud perpetrators. The common theme in this data is that while it is often worthwhile to pursue remedial action against perpetrators, victims will usually not be made whole. Internal Action Taken Against Perpetrator FIG. 41 How do victim organizations punish fraud perpetrators? Termination 65% Survey respondents provided information about how perpetrators were internally punished or dealt with. Not surprisingly, termination was the most common disciplinary action taken in occupational fraud cases (65%). It is noteworthy that over onethird of perpetrators were not terminated as a direct result of committing fraud. In some cases the victim organization imposed lighter punishments such as permitting the offender to resign (10% of cases) or placing him or her on probation (8% of cases), while in 6% of cases the fraudster received no punishment at all. Settlement agreement Perpetrator was no longer with organization Permitted or required resignation Probation or suspension No punishment Other 12% 11% 10% 8% 6% 4% 47

48 From the perspective of ethics and fairness, there might be no reason to treat a high-level fraud perpetrator more leniently than an entry-level employee. However, our data shows that punishment is substantially dependent on the perpetrator s position at the organization. While employees and mid-level managers are more likely than not to be terminated (72% and 67%, respectively), fewer than half of owners/executives were terminated (44%). Generally, the higher up the perpetrators were at the organization, the more likely they were to receive lighter punishments (e.g., permitted or required resignation) or no punishment at all. FIG. 42 Does the perpetrator s position affect the punishment for fraud? Termination Settlement agreement Perpetrator was no longer with organization Permitted or required resignation Probation or suspension No punishment Owner/executive Manager Employee 44% 67% 72% 18% 12% 10% 15% 12% 10% 16% 11% 8% 7% 8% 8% 12% 5% 3% Criminal Prosecutions and Civil Suits After a fraud has been discovered and investigated, the case might proceed to prosecution, civil litigation, both, or neither. There are many factors that can affect this result, such as the amount of the financial loss, the strength of evidence, and prosecutorial discretion. Figure 43 shows the percent of cases that were referred to law enforcement or resulted in a civil suit being filed for each of our studies dating back to This chart illustrates that the rate of criminal referrals has gradually decreased over that time, from 69% in 2008 to 58% in In contrast, the rate at which civil suits are filed has stayed consistent, ranging from 22% to 24% within the same timeframe. 48 Case Results Report to the Nations

49 FIG. 43 How often is litigation pursued against occupational fraud perpetrators? 69% 22% 64% 24% 65% 23% % Referred to law enforcement 22% Civil suit filed 59% 58% 23% 23% Results of Criminal or Civil Litigation We also asked respondents about the results of any litigation pursued; this data is shown in Figures 44 and 45. On the criminal side, most cases that were referred to law enforcement ended in a plea agreement or a conviction at trial (73% combined). If a case referred to law enforcement did not end in a conviction, it was most likely because law enforcement declined to prosecute (18%). The results suggest that once law enforcement decides that it will proceed with prosecution, it has an overwhelming chance of securing a conviction; only 1% of defendants obtained an acquittal. In addition, more than half of judgments in civil suits were favorable to victims, with an additional 27% of cases being settled. Perpetrators obtained a favorable judgment in only 15% of civil cases that went to trial. FIG. 44 What were the results of criminal referrals? FIG. 45 What were the results of civil suits? 53% 53% 27% 20% 18% 15% 7% 1% 5% Pleaded guilty/no contest Convicted Declined at trial to prosecute Other Acquitted Judgment for victim Settled Judgment for perpetrator Other Case Results Report to the Nations 49

50 Reasons for Not Referring Cases to Law Enforcement We know that the rate of victim organizations reporting occupational fraud to law enforcement has decreased in recent years (see Figure 43 on pg. 49). There are many reasons why organizations might decline to refer cases for prosecution. In our study, the top cause cited was fear of bad publicity (38%), followed by internal discipline being sufficient (33%) and costliness (24%). FIG. 46 Why do organizations decide not to refer cases to law enforcement? Fear of bad publicity 38% Internal discipline sufficient 33% Too costly 24% Private settlement 21% Lack of evidence 12% Other 12% Civil suit 4% Perpetrator disappeared 2% WHEN VICTIM ORGANIZATIONS ARE FINED In addition to the direct cost of the fraud, some organizations receive monetary fines from authorities for having inadequate controls or allowing the fraud to occur. 20% 31% 34% 14% OF FINES <$10,000 the median fine was $100,000 OF FINES $10,000 $99,999 OF FINES $100,000 $999,999 OF FINES $1,000,000+ Financial statement fraud schemes were the most likely to result in a fine to the victim organization 17% Financial Asset statement fraud 11% Corruption 8% misappropriation 50 Case Results Report to the Nations

51 RECOVERING FRAUD LOSSES After a fraud has been detected, the victim might try to recover its losses from the fraudster or other sources. Our data shows that victims are rarely made whole. 53% Recovered NOTHING 15% Recovered ALL LOSSES 32% MaDe a Partial Recovery LOST <$10,000 The more victims lose, the less likely they are RECOVER to make a FULL RECOVERY ALL LOSSES LOST $10,000 $100,000 LOST $100,001 $1,000,000 LOST $1,000, % 16% 13% 8% RECOVER ALL LOSSES RECOVER ALL LOSSES RECOVER ALL LOSSES Case Results Report to the Nations 51

52 METHODOLOGY Who contributed to our survey? The 2018 Report to the Nations is based on the results of the 2017 Global Fraud Survey, an online survey opened to 41,573 Certified Fraud Examiners (CFEs) from July 2017 to October As part of the survey, respondents were asked to provide a narrative description of the single largest fraud case they had investigated since January Additionally, after completing the survey the first time, respondents were provided the option to submit information about a second case that they investigated. Cases submitted were required to meet the following four criteria: 1. The case must have involved occupational fraud (defined as fraud committed by a person against the organization for which he or she works). 2. The investigation must have occurred between January 2016 and the time of survey participation. 3. The investigation must have been complete at the time of survey participation. 4. The respondent must have been reasonably sure the perpetrator(s) was (were) identified. Respondents were then presented with 76 questions to answer regarding the particular details of the fraud case, including information about the perpetrator, the victim organization, and the methods of fraud employed, as well as fraud trends in general. (Respondents were not asked to identify the perpetrator or the victim.) We received 7,232 total responses to the survey, 2,690 of which were usable for purposes of this report. The data contained herein is based solely on the information provided in these 2,690 survey responses. Analysis Methodology In calculating the percentages discussed throughout this report, we used the total number of complete and relevant responses for the question(s) being analyzed. Specifically, we excluded any blank responses or instances where the participant indicated that he or she did not know the answer to a question. Consequently, the total number of cases included in each analysis varies. In addition, several survey questions allowed participants to select more than one answer. Therefore, the sum of percentages in many figures throughout the report exceeds 100%. The sum of percentages in other figures might not be exactly 100% (i.e., it might be 99% or 101%) due to rounding of individual category data. 52 Methodology Report to the Nations

53 Unless otherwise indicated, all loss amounts discussed throughout the report are calculated using median loss rather than mean, or average, loss. Average losses were skewed by a limited number of very high-dollar frauds. Using median loss provides a more conservative and we believe more accurate picture of the typical impact of occupational fraud schemes. Additionally, we excluded median loss calculations for categories for which there were fewer than ten responses. Because the direct losses caused by financial statement frauds are typically spread among numerous stakeholders, obtaining an accurate estimate for this amount is extremely difficult. Consequently, for schemes involving financial statement fraud, we asked survey participants to provide the gross amount of the financial statement misstatement (over- or under-statement) involved in the scheme. All losses reported for financial statement frauds throughout this report are based on those reported amounts. Methodology Report to the Nations 53

54 Survey Participants To provide context for the survey responses and to understand who investigates cases of occupational fraud, we asked respondents to provide certain information about their professional experience and qualifications. Primary Occupation As noted in Figure 47, 37% of survey respondents indicated that their primary occupation is as a fraud examiner/investigator, followed by 22% who indicated they are internal auditors. FIG. 47 What was the primary occupation of survey participants? Fraud examiner/investigator Internal auditor Accounting/finance professional Law enforcement Compliance and ethics professional 37% 22% 9% 7% 5% Risk and controls professional 4% External/independent auditor 4% Consultant Other Corporate security and loss prevention 4% 3% 3% Attorney 1% Private investigator Bank examiner 1% 1% IT/computer forensics specialist 1% Educator <1% 54 Methodology Report to the Nations

55 Nature of Fraud Examination Role More than half of the CFEs who participated in our study work in-house, conducting fraud examinations on behalf of a single company or agency. Twenty-seven percent work for a professional services firm that conducts fraud examinations for client organizations, while 18% work in law enforcement and conduct fraud examinations under the authority of their agency. Experience The CFEs who participated in our study had a median 11 years of experience in the fraud examination field, with over 30% having more than 15 years of experience. Respondents also provided information on the total number of fraud cases they worked on in the prior two years. As shown in Figure 50, one-quarter investigated more than 20 cases, while 41% investigated five or fewer cases during that time. FIG. 50 How many fraud cases have survey participants investigated in the past two years? FIG. 48 What was the professional role of the survey participants? Law enforcement 18% Other 2% In-house examiner 53% Professional services firm 27% FIG. 49 How much fraud examination experience did survey participants have? years 13% More than 20 years 19% years 18% 5 years or fewer 22% 6 10 years 28% More than 20 cases (25%) cases (7%) cases (7%) 6 10 cases (20%) 5 or fewer cases (41%) Methodology Report to the Nations 55

56 REGIONAL FOCUS ASIA-PACIFIC FIG. 51 What are the most common occupational fraud schemes in the Asia-Pacific region? FIG. 52 How is occupational fraud initially detected in the Asia-Pacific region? Corruption Tip Noncash Expense reimbursements Billing Financial statement fraud Cash on hand Check and payment tampering Cash larceny Skimming Payroll Register disbursements 56 Asia-Pacific Report to the Nations 47% 51% 25% 17% Internal audit Management review External audit 14% Other 13% By accident 13% Document examination 8% Account reconciliation 8% 7% 4% 3% Surveillance/monitoring Notification by law enforcement IT controls Confession 16% 10% 8% 4% 4% 3% 3% 2% 1% 1% <1%

57 FIG. 53 What anti-fraud controls are the most common in the Asia-Pacific region? Control Percent of cases External audit of financial statements 93% Code of conduct 87% Internal audit department 80% Management certification of financial statements 79% Hotline 74% External audit of internal controls over financial reporting 73% Management review 71% Independent audit committee 69% Anti-fraud policy 60% Fraud training for employees 59% Fraud training for managers/executives 57% Employee support programs 49% Dedicated fraud department, function, or team 42% Formal fraud risk assessments 37% Surprise audits 34% Proactive data monitoring/analysis 32% Job rotation/mandatory vacation 16% Rewards for whistleblowers 11% FIG. 54 How does the perpetrator s level of authority relate to occupational fraud in the Asia-Pacific region? MEDIAN LOSS PERCENT OF CASES 30% Employee Manager Owner/executive $58,000 41% $323,000 26% FIG. 55 Cases by country in the Asia-Pacific region Country Number of cases Australia 38 Cambodia 2 China 49 East Timor 1 Hong Kong 10 Indonesia 29 Japan 4 Macau 1 Malaysia 14 Myanmar (Burma) 1 New Zealand 8 Papua New Guinea 1 Philippines 25 Singapore 17 South Korea 6 Taiwan 6 Thailand 3 Vietnam 5 Total cases: 220 MEDIAN LOSS: usd 236, CASES 11% OF ALL CASES $1,000,000 Asia-Pacific Report to the Nations 57

58 REGIONAL FOCUS CANADA FIG. 56 What are the most common occupational fraud schemes in Canada? FIG. 57 How is occupational fraud initially detected in Canada? Corruption Tip Billing Noncash Financial statement fraud Skimming Cash on hand Expense reimbursements Check and payment tampering Payroll Register disbursements Cash larceny 58 Canada Report to the Nations 32% 40% 20% 18% 14% Internal audit Management review Other Surveillance/monitoring 13% External audit 13% Account reconciliation 11% Document examination 10% By accident 6% IT controls 3% 3% 21% 15% 7% 6% 5% 5% 4% 4% 1%

59 FIG. 58 What anti-fraud controls are the most common in Canada? Control Percent of cases Code of conduct 80% External audit of financial statements 72% Internal audit department 71% Employee support programs 71% Management review 68% Management certification of financial statements 67% Independent audit committee 61% Hotline 57% External audit of internal controls over financial reporting 54% Fraud training for managers/executives 51% Fraud training for employees 51% Anti-fraud policy 44% Proactive data monitoring/analysis 38% Formal fraud risk assessments 35% Dedicated fraud department, function, or team 33% Surprise audits 28% Job rotation/mandatory vacation 15% Rewards for whistleblowers 10% MEDIAN LOSS: usd 200, CASES 4% OF ALL CASES FIG. 59 How does the perpetrator s level of authority relate to occupational fraud in Canada? 47% MEDIAN LOSS PERCENT OF CASES 27% 23% Employee Manager Owner/executive $156,000 $205,000 $600,000 Canada Report to the Nations 59

60 REGIONAL FOCUS EASTERN EUROPE AND WESTERN/ CENTRAL ASIA FIG. 60 What are the most common occupational fraud schemes in Eastern Europe and Western/ Central Asia? FIG. 61 How is occupational fraud initially detected in Eastern Europe and Western/ Central Asia? Corruption Tip Noncash Billing Expense reimbursements Cash larceny Financial statement fraud Cash on hand Check and payment tampering Skimming Register disbursements Payroll 60 Eastern Europe and Western/Central Asia Report to the Nations 60% 30% 15% 11% 40% Internal audit Management review By accident Other 10% Account reconciliation 10% Surveillance/monitoring 9% IT controls 5% 4% 4% 2% Notification by law enforcement External audit Document examination 20% 16% 7% 6% 3% 2% 2% 1% 1% 1%

61 FIG. 62 What anti-fraud controls are the most common in Eastern Europe and Western/Central Asia? Control Percent of cases External audit of financial statements 95% Internal audit department 91% Code of conduct 83% Management certification of financial statements 79% Management review 76% Hotline 75% External audit of internal controls over financial reporting 75% Independent audit committee 73% Anti-fraud policy 66% Fraud training for employees 58% Dedicated fraud department, function, or team 57% Fraud training for managers/executives 56% Formal fraud risk assessments 46% Surprise audits 40% Proactive data monitoring/analysis 36% Employee support programs 27% Job rotation/mandatory vacation 17% Rewards for whistleblowers 5% FIG. 63 How does the perpetrator s level of authority relate to occupational fraud in Eastern Europe and Western/Central Asia? MEDIAN LOSS PERCENT OF CASES 39% Employee Manager Owner/executive $28,000 33% $155,000 28% FIG. 64 Cases by country in Eastern Europe and Western/Central Asia Country Number of cases Bulgaria 3 Czech Republic 3 Georgia 1 Hungary 1 Kazakhstan 4 Kosovo 2 Latvia 2 Lithuania 1 Macedonia 2 Montenegro 1 Poland 5 Romania 11 Russia 15 Serbia 9 Slovakia 4 Slovenia 4 Tajikistan 1 Turkey 13 Ukraine 3 Uzbekistan 1 Total cases: 86 MEDIAN LOSS: usd 150, CASES 4% OF ALL CASES $3,700,000 Eastern Europe and Western/Central Asia Report to the Nations 61

62 REGIONAL FOCUS LATIN AMERICA AND THE CARIBBEAN FIG. 65 What are the most common occupational fraud schemes in Latin America and the Caribbean? FIG. 66 How is occupational fraud initially detected in Latin America and the Caribbean? Corruption Tip Noncash Cash on hand Financial statement fraud Skimming Cash larceny Billing Payroll Check and payment tampering Register disbursements Expense reimbursements 62 Latin America and the Caribbean Report to the Nations 49% 51% 22% 17% 14% 12% 11% 11% 9% 8% 3% 1% Internal audit Management review Surveillance/monitoring Other External audit Account reconciliation By accident Document examination Confession IT controls 14% 10% 5% 5% 5% 5% 4% 3% 2% 1%

63 FIG. 67 What anti-fraud controls are the most common in Latin America and the Caribbean? Control Percent of cases Internal audit department 89% External audit of financial statements 86% Code of conduct 81% Management certification of financial statements 73% Management review 71% External audit of internal controls over financial reporting 70% Hotline 68% Independent audit committee 61% Employee support programs 51% Anti-fraud policy 50% Fraud training for employees 50% Fraud training for managers/executives 48% Dedicated fraud department, function, or team 44% Formal fraud risk assessments 40% Surprise audits 35% Proactive data monitoring/analysis 32% Job rotation/mandatory vacation 26% Rewards for whistleblowers 6% FIG. 68 How does the perpetrator s level of authority relate to occupational fraud in Latin America and the Caribbean? 40% 40% FIG. 69 Cases by country in Latin America and the Caribbean Country Number of cases Antigua and Barbuda 1 Argentina 8 Bahamas 3 Belize 1 Brazil 22 Chile 8 Colombia 10 Costa Rica 1 Curaçao 2 Grenada 1 Haiti 1 Honduras 1 Jamaica 6 Mexico 29 Nicaragua 3 Peru 5 Saint Kitts and Nevis 1 Trinidad and Tobago 7 Total cases: 110 MEDIAN LOSS: usd 193,000 MEDIAN LOSS PERCENT OF CASES 19% Employee Manager Owner/executive $100,000 $150, CASES 5% OF ALL CASES $900,000 Latin America and the Caribbean Report to the Nations 63

64 REGIONAL FOCUS MIDDLE EAST AND NORTH AFRICA FIG. 70 What are the most common occupational fraud schemes in the Middle East and North Africa? FIG. 71 How is occupational fraud initially detected in the Middle East and North Africa? Corruption Tip Cash on hand Noncash Cash larceny Billing Skimming Expense reimbursements Check and payment tampering Payroll Financial statement fraud Register disbursements 64 Middle East and North Africa Report to the Nations 38% 49% 23% 19% 15% 15% 13% 9% 8% Internal audit Management review Other Account reconciliation Surveillance/monitoring By accident Document examination 4% Notification by law enforcement 4% External audit 2% 20% 16% 9% 5% 4% 2% 2% 2% 2%

65 FIG. 72 What anti-fraud controls are the most common in the Middle East and North Africa? FIG. 74 Cases by country in the Middle East and North Africa Control Percent of cases Country Number of cases External audit of financial statements 93% Internal audit department 85% Management certification of financial statements 81% Code of conduct 78% External audit of internal controls over financial reporting 69% Management review 68% Independent audit committee 67% Hotline 59% Surprise audits 59% Anti-fraud policy 54% Fraud training for managers/executives 47% Fraud training for employees 47% Dedicated fraud department, function, or team 44% Formal fraud risk assessments 40% Proactive data monitoring/analysis 40% Employee support programs 33% Job rotation/mandatory vacation 23% Rewards for whistleblowers 9% FIG. 73 How does the perpetrator s level of authority relate to occupational fraud in the Middle East and North Africa? 41% Algeria 1 Bahrain 2 Cyprus 5 Egypt 8 Iraq 1 Israel 4 Jordan 10 Kuwait 5 Lebanon 2 Oman 4 Qatar 8 Saudi Arabia 16 Syria 1 United Arab Emirates 34 Total cases: 101 MEDIAN LOSS: usd 200,000 MEDIAN LOSS PERCENT OF CASES 33% 23% Employee Manager Owner/executive $105,000 $175, CASES 5% OF ALL CASES $1,250,000 Middle East and North Africa Report to the Nations 65

66 REGIONAL FOCUS SOUTHERN ASIA FIG. 75 What are the most common occupational fraud schemes in Southern Asia? FIG. 76 How is occupational fraud initially detected in Southern Asia? Corruption Tip Noncash Billing Expense reimbursements Skimming Financial statement fraud Cash on hand Cash larceny Check and payment tampering Payroll Register disbursements 62% 20% 13% 13% 12% 10% 9% 8% 7% 3% 1% 53% Internal audit Management review Surveillance/monitoring Other External audit By accident Account reconciliation Notification by law enforcement Document examination Confession IT controls 66 Southern Asia Report to the Nations 13% 10% 4% 3% 3% 3% 3% 2% 2% 2% 1%

67 FIG. 77 What anti-fraud controls are the most common in Southern Asia? Control Percent of cases External audit of financial statements 90% Internal audit department 88% Code of conduct 88% Management certification of financial statements 85% External audit of internal controls over financial reporting 77% Independent audit committee 76% Management review 76% Hotline 63% Anti-fraud policy 58% Fraud training for employees 56% Surprise audits 53% Fraud training for managers/executives 53% Dedicated fraud department, function, or team 49% Employee support programs 43% Formal fraud risk assessments 42% Proactive data monitoring/analysis 35% Job rotation/mandatory vacation 25% Rewards for whistleblowers 9% FIG. 78 How does the perpetrator s level of authority relate to occupational fraud in Southern Asia? FIG. 79 Cases by country in Southern Asia Country Number of cases Afghanistan 6 Bangladesh 3 India 72 Maldives 2 Pakistan 13 Total cases: 96 MEDIAN LOSS: usd 100, CASES 5% OF ALL CASES 46% MEDIAN LOSS PERCENT OF CASES 31% 19% Employee Manager Owner/executive $50,000 $100,000 $350,000 Southern Asia Report to the Nations 67

68 REGIONAL FOCUS SUB-SAHARAN AFRICA FIG. 80 What are the most common occupational fraud schemes in Sub-Saharan Africa? Corruption Cash on hand Noncash Billing Check and payment tampering Cash larceny Expense reimbursements Skimming Financial statement fraud Payroll Register disbursements 68 Sub-Saharan Africa Report to the Nations FIG. 81 How is occupational fraud initially detected in Sub-Saharan Africa? 49% 21% 18% 17% Tip 40% Internal audit Management review Account reconciliation By accident 15% Other 14% Document examination 12% External audit 10% Surveillance/monitoring 9% 6% 2% Notification by law enforcement IT controls Confession 19% 12% 7% 6% 4% 4% 2% 2% 1% 1% 1%

69 FIG. 82 What anti-fraud controls are the most common in Sub-Saharan Africa? Control Percent of cases External audit of financial statements 90% Code of conduct 89% Internal audit department 87% Management certification of financial statements 81% Independent audit committee 73% External audit of internal controls over financial reporting 72% Hotline 70% Management review 69% Anti-fraud policy 60% Fraud training for employees 55% Fraud training for managers/executives 52% Employee support programs 50% Formal fraud risk assessments 46% Surprise audits 46% Dedicated fraud department, function, or team 43% Proactive data monitoring/analysis 40% Job rotation/mandatory vacation 25% Rewards for whistleblowers 20% FIG. 83 How does the perpetrator s level of authority relate to occupational fraud in Sub-Saharan Africa? MEDIAN LOSS PERCENT OF CASES 48% 36% Employee Manager Owner/executive $55,000 $73,000 14% FIG. 84 Cases by country in Sub-Saharan Africa Country Number of cases Angola 3 Botswana 1 Cameroon 1 Central African Republic 1 Chad 3 Congo, Democratic Republic of the 3 Congo, Republic of the 1 Cote d Ivoire 5 Equatorial Guinea 1 Gambia 1 Ghana 8 Guinea 1 Kenya 34 Liberia 8 Madagascar 2 Malawi 3 Mali 4 Mauritania 1 Mauritius 2 Mozambique 1 Namibia 4 Nigeria 55 Rwanda 1 Senegal 1 Somalia 2 South Africa 87 Sudan 1 Swaziland 1 Tanzania 5 Uganda 11 Zambia 5 Zimbabwe 10 Total cases: 267 MEDIAN LOSS: usd 90, CASES 13% OF ALL CASES $2,716,000 Sub-Saharan Africa Report to the Nations 69

70 REGIONAL FOCUS UNITED STATES FIG. 85 What are the most common occupational fraud schemes in the United States? FIG. 86 How is occupational fraud initially detected in the United States? Corruption Tip Billing Noncash Expense reimbursements Cash on hand Check and payment tampering Skimming Cash larceny Payroll Financial statement fraud Register disbursements 37% 30% 26% 21% 17% 15% 15% 14% 11% 10% 9% 3% Management review Internal audit By accident Other Account reconciliation Document examination External audit Notification by law enforcement Surveillance/monitoring Confession IT controls 70 United States Report to the Nations 14% 13% 9% 7% 5% 5% 3% 3% 3% 1% 1%

71 FIG. 87 What anti-fraud controls are the most common in the United States? Control Percent of cases Code of conduct 73% External audit of financial statements 69% Employee support programs 62% Management certification of financial statements 61% Internal audit department 60% External audit of internal controls over financial reporting 60% Management review 59% Hotline 56% Fraud training for employees 50% Fraud training for managers/executives 49% Independent audit committee 49% Anti-fraud policy 47% Formal fraud risk assessments 37% Proactive data monitoring/analysis 36% Dedicated fraud department, function, or team 35% Surprise audits 31% Job rotation/mandatory vacation 15% Rewards for whistleblowers 12% MEDIAN LOSS: usd 108,000 1,000 CASES 48% OF ALL CASES FIG. 88 How does the perpetrator s level of authority relate to occupational fraud in the United States? 48% MEDIAN LOSS PERCENT OF CASES 31% 18% Employee Manager Owner/executive $50,000 $150,000 $637,000 United States Report to the Nations 71

72 REGIONAL FOCUS WESTERN EUROPE FIG. 89 What are the most common occupational fraud schemes in Western Europe? FIG. 90 How is occupational fraud initially detected in Western Europe? Corruption Tip Billing Noncash Cash on hand Expense reimbursements Cash larceny Check and payment tampering Financial statement fraud Skimming Payroll Register disbursements 72 Western Europe Report to the Nations 36% 28% 17% 46% Management review Internal audit Other 15% Account reconciliation 13% 8% 8% 8% By accident Document examination External audit Surveillance/monitoring 5% Notification by law enforcement 4% IT controls 1% Confession 11% 9% 6% 5% 5% 4% 4% 4% 2% 2% 1%

73 FIG. 91 What anti-fraud controls are the most common in Western Europe? Control Percent of cases Code of conduct 93% Management certification of financial statements 88% External audit of financial statements 88% External audit of internal controls over financial reporting 85% Management review 83% Internal audit department 80% Independent audit committee 78% Hotline 76% Anti-fraud policy 65% Fraud training for managers/executives 63% Fraud training for employees 59% Formal fraud risk assessments 53% Dedicated fraud department, function, or team 49% Employee support programs 48% Surprise audits 41% Proactive data monitoring/analysis 38% Job rotation/mandatory vacation 22% Rewards for whistleblowers 10% FIG. 93 Cases by country in Western Europe Country Number of cases Austria 4 Belgium 7 Denmark 2 Finland 2 France 4 Germany 16 Greece 22 Iceland 1 Ireland 2 Italy 8 Netherlands 10 Norway 2 Portugal 1 Spain 4 Switzerland 11 United Kingdom 34 Total cases: 130 FIG. 92 How does the perpetrator s level of authority relate to occupational fraud in Western Europe? MEDIAN LOSS PERCENT OF CASES 41% Employee Manager Owner/executive $90,000 34% $235,000 18% MEDIAN LOSS: usd 200, CASES 6% OF ALL CASES $500,000 Western Europe Report to the Nations 73

74 INDEX OF FIGURES Age of Perpetrator How does the perpetrator s age relate to occupational fraud? 41 Anti-Fraud Controls How do internal control weaknesses vary by scheme type? 32 How does the presence of anti-fraud controls relate to median loss? 28 How does the presence of anti-fraud controls relate to the duration of fraud? 29 What anti-fraud controls are most common? 27 Based on region What are the primary internal control weaknesses that contribute to occupational fraud? 31 Behavioral Red Flags of Perpetrator Do fraud perpetrators also engage in non-fraud-related misconduct? 46 Do fraud perpetrators experience negative HR-related issues prior to or during their frauds? 46 How often do perpetrators exhibit behavioral red flags? 45 Spotlight: The red flags of fraud 44 Case Results Does the perpetrator s position affect the punishment for fraud? 48 How do victim organizations punish fraud perpetrators? 47 How often is litigation pursued against occupational fraud perpetrators? 49 Spotlight: Recovering fraud losses 51 What were the results of civil suits? 49 What were the results of criminal referrals? 49 Spotlight: When victim organizations are fined 50 Why do organizations decide not to refer cases to law enforcement? 50 Concealment of Fraud Schemes Spotlight: Concealing fraud Criminal and Employment Background of Perpetrator Do perpetrators tend to have prior employmentrelated disciplinary actions for fraud? 43 Do perpetrators tend to have prior fraud convictions? 42 Was a background check run on the perpetrator prior to hiring? 30 What types of background checks were run on the perpetrator prior to hiring? 30 Demographics of Survey Participants How many fraud cases have survey participants investigated in the past two years? 55 How much fraud examination experience did survey participants have? 55 What was the primary occupation of survey participants? 54 What was the professional role of the survey participants? 55 Department of Perpetrator What are the most common occupational fraud schemes in high-risk departments? 38 What departments pose the greatest risk for occupational fraud? 37 Detection Method How does detection method relate to fraud duration and loss? 18 How is occupational fraud initially detected? 17 Based on region Who reports occupational fraud? 17 Spotlight: Hotlines and reporting mechanisms 19 Distribution of Losses How much does an occupational fraud cost the victim organization? 9 Education Level of Perpetrator How does the perpetrator s education level relate to occupational fraud? 41 Gender of Perpetrator How does gender distribution and median loss vary based on the perpetrator s level of authority? 40 How does the gender distribution of perpetrators vary by region? 39 How does the perpetrator s gender relate to occupational fraud? Index of Figures Report to the Nations

75 Geographical Region of Victim Organization Countries with reported cases and median loss for each region 7 How does the gender distribution of perpetrators vary by region? 39 Regional focus (most common schemes, detection, anti-fraud controls, perpetrator s level of authority, and cases by country) Asia-Pacific Canada Eastern Europe and Western/Central Asia Latin America and the Caribbean Middle East and North Africa Southern Asia Sub-Saharan Africa United States Western Europe Industry of Victim Organization How does occupational fraud affect organizations in different industries? 24 What are the most common occupational fraud schemes in various industries? 25 Number of Perpetrators How does the number of perpetrators in a scheme relate to occupational fraud? 42 Position of Perpetrator How does gender distribution and median loss vary based on the perpetrator s level of authority? 40 How does the perpetrator s level of authority relate to occupational fraud? 33 Based on region How does the perpetrator s level of authority relate to scheme duration? 34 How does the perpetrator s tenure relate to median loss at different levels of authority? 36 Spotlight: Fraud committed by owners and executives Scheme Duration How does detection method relate to fraud duration and loss? 18 How does the duration of a fraud relate to median loss? 14 How does the perpetrator s level of authority relate to scheme duration? 34 How does the presence of anti-fraud controls relate to the duration of fraud? 29 How long do different occupational fraud schemes last? 15 Scheme Type How do internal control weaknesses vary by scheme type? 32 How is occupational fraud committed? 10 How long do different occupational fraud schemes last? 15 How often do fraudsters commit more than one type of occupational fraud? 12 Occupational Fraud and Abuse Classification System (the Fraud Tree) 11 Spotlight: Corruption 13 What are the most common occupational fraud schemes in high-risk departments? 38 What are the most common occupational fraud schemes in various industries? 25 What are the most common occupational fraud schemes based on region? What asset misappropriation schemes present the greatest risk? 12 Size of Victim Organization How does an organization s size relate to its occupational fraud risk? 21 Spotlight: Fraud in small businesses Tenure of Perpetrator How does the perpetrator s tenure relate to median loss at different levels of authority? 36 How does the perpetrator s tenure relate to occupational fraud? 35 Type of Victim Organization What levels of government are victimized? 20 What types of organizations are victimized? 20 Index of Figures Report to the Nations 75

76 FRAUD PREVENTION CHECKLIST The most cost-effective way to limit fraud losses is to prevent fraud from occurring. This checklist is designed to help organizations test the effectiveness of their fraud prevention measures. Additional guidance, resources, and tools for managing organizational fraud risk can be found at ACFE.com/fraudrisktools. 1. Is ongoing anti-fraud training provided to all employees of the organization? Do employees understand what constitutes fraud? Have the costs of fraud to the company and everyone in it including lost profits, adverse publicity, potential job loss, and decreased morale and productivity been made clear to employees? Do employees know where to seek advice when faced with uncertain ethical decisions, and do they believe that they can speak freely? Has a policy of zero-tolerance for fraud been communicated to employees through words and actions? 2. Is an effective fraud reporting mechanism in place? Have employees been taught how to communicate concerns about known or potential wrongdoing? Is there a reporting channel, such as a third-party hotline, available to employees? Do employees trust that they can report suspicious activity anonymously and/or confidentially (where legally permissible) and without fear of reprisal? Has it been made clear to employees that reports of suspicious activity will be promptly and thoroughly evaluated? Do reporting policies and mechanisms extend to vendors, customers, and other outside parties? 3. To increase employees perception of detection, are the following proactive measures taken and publicized to employees? Is possible fraudulent conduct aggressively sought out, rather than dealt with passively? Does the organization send the message that it actively seeks out fraudulent conduct through fraud assessment questioning by auditors? Are surprise fraud audits performed in addition to regularly scheduled audits? Is continuous monitoring software used to detect fraud and, if so, has the use of such software been made known throughout the organization? 4. Is the management climate/tone at the top one of honesty and integrity? Are employees surveyed to determine the extent to which they believe management acts with honesty and integrity? Are performance goals realistic? Have fraud prevention goals been incorporated into the performance measures that are used to evaluate managers and to determine performance-related compensation? Has the organization established, implemented, and tested a process for oversight of fraud risks by the board of directors or others charged with governance (e.g., the audit committee)? 76 Fraud Prevention Checklist Report to the Nations

77 5. Are fraud risk assessments performed to proactively identify and mitigate the company s vulnerabilities to internal and external fraud? 6. Are strong anti-fraud controls in place and operating effectively, including the following? Proper separation of duties Use of authorizations Physical safeguards Job rotations Mandatory vacations 9. Are employee support programs in place to assist employees struggling with addiction, mental/emotional health, family, or financial problems? 10. Is an open-door policy in place that allows employees to speak freely about pressures, providing management the opportunity to alleviate such pressures before they become acute? 11. Are regular, anonymous surveys conducted to assess employee morale? 7. Does the internal audit department, if one exists, have adequate resources and authority to operate effectively and without undue influence from senior management? 8. Does the hiring policy include the following (where permitted by law)? Past employment verification Criminal and civil background checks Credit checks Drug screening Education verification References checks Fraud Prevention Checklist Report to the Nations 77

78 GLOSSARY OF TERMINOLOGY Asset misappropriation: A scheme in which an employee steals or misuses the employing organization s resources (e.g., theft of company cash, false billing schemes, or inflated expense reports) Billing scheme: A fraudulent disbursement scheme in which a person causes his or her employer to issue a payment by submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases (e.g., employee creates a shell company and bills employer for services not actually rendered; employee purchases personal items and submits an invoice to employer for payment) Cash larceny: A scheme in which an incoming payment is stolen from an organization after it has been recorded on the organization s books and records (e.g., employee steals cash and checks from daily receipts before they can be deposited in the bank) Cash-on-hand misappropriations: A scheme in which the perpetrator misappropriates cash kept on hand at the victim organization s premises (e.g., employee steals cash from a company vault) Check or payment tampering scheme 8 : A fraudulent disbursement scheme in which a person steals his or her employer s funds by intercepting, forging, or altering a check or electronic payment drawn on one of the organization s bank accounts (e.g., employee steals blank company checks and makes them out to himself or herself or an accomplice; employee re-routes an outgoing electronic payment to a vendor to be deposited into his or her own bank account) Corruption: A scheme in which an employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit (e.g., schemes involving bribery or conflicts of interest) Employee support programs: Programs that provide support and assistance to employees dealing with personal issues or challenges, such as counseling services for drug, family, or financial problems Expense reimbursements scheme: A fraudulent disbursement scheme in which an employee makes a claim for reimbursement of fictitious or inflated business expenses (e.g., employee files fraudulent expense report, claiming personal travel, nonexistent meals) Financial statement fraud: A scheme in which an employee intentionally causes a misstatement or omission of material information in the organization s financial reports (e.g., recording fictitious revenues, understating reported expenses, or artificially inflating reported assets) Hotline: A mechanism to report fraud or other violations, whether managed internally or by an external party Management review: The process of management reviewing organizational controls, processes, accounts, or transactions for adherence to company policies and expectations Noncash misappropriations: Any scheme in which an employee steals or misuses noncash assets of the victim organization (e.g., employee steals inventory from a warehouse or storeroom; employee steals or misuses confidential customer information) Occupational fraud: The use of one s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization s resources or assets Payroll scheme: A fraudulent disbursement scheme in which an employee causes his or her employer to issue a payment by making false claims for compensation (e.g., employee claims overtime for hours not worked; employee adds ghost employees to the payroll) Primary perpetrator: The person who worked for the victim organization and who was reasonably confirmed as the primary culprit in the case Register disbursements scheme: A fraudulent disbursement scheme in which an employee makes false entries on a cash register to conceal the fraudulent removal of cash (e.g., employee fraudulently voids a sale on his or her cash register and steals the cash) Skimming: A scheme in which an incoming payment is stolen from an organization before it is recorded on the organization s books and records (e.g., employee accepts payment from a customer but does not record the sale and instead pockets the money) 8 In previous reports, this category was referred to simply as check tampering. However, to better reflect the increasing shift toward electronic payment methods, we have changed the category title to check and payment tampering. 78 Glossary of Terminology Report to the Nations

79 ABOUT THE ACFE Founded in 1988 by Dr. Joseph T. Wells, CFE, CPA, the Association of Certified Fraud Examiners (ACFE) is the world s largest anti-fraud organization and premier provider of anti-fraud training and education. Together with nearly 85,000 members in more than 180 countries, the ACFE is reducing business fraud worldwide and providing the training and resources needed to fight fraud more effectively. The ACFE provides educational tools and practical solutions for anti-fraud professionals through events, education, publications, networking, and educational tools for colleges and universities. Certified Fraud Examiners The ACFE offers its members the opportunity for professional certification with the Certified Fraud Examiner (CFE) credential. The CFE is preferred by businesses and government entities around the world, and indicates expertise in fraud prevention and detection. CFEs are anti-fraud experts who have demonstrated knowledge in four critical areas: Financial Transactions and Fraud Schemes, Law, Investigation, and Fraud Prevention and Deterrence. Membership Members of the ACFE include accountants, internal auditors, fraud investigators, law enforcement officers, lawyers, business leaders, risk/compliance professionals, and educators, all of whom have access to expert training, educational tools, and resources. Whether their career is focused exclusively on preventing and detecting fraudulent activities or they just want to learn more about fraud, the ACFE provides the essential tools and resources necessary for anti-fraud professionals to accomplish their objectives. To learn more, visit ACFE.com or call (800) / +1 (512) Contact Association of Certified Fraud Examiners Global Headquarters 716 West Ave Austin, TX USA Phone: (800) / +1 (512) ACFE.com info@acfe.com TERMS OF USE: The Report to the Nations and any accompanying charts, graphs, PowerPoint slides, or related content (collectively the Materials ) are available for use free of charge as a public service of the ACFE. You may download, copy and/or distribute the Materials for personal or business use on the following conditions: 1. No portion of the Materials may be sold or otherwise licensed, shared or transferred to any party for a fee, or included in any work that is to be sold, licensed, shared or transferred to any party for a fee, without the express written consent of the ACFE. The foregoing notwithstanding, you are permitted to use the materials as part of a speech or presentation for which an admission fee is charged. 2. The Materials must be properly attributed to the ACFE, including the name of the publication. An example of proper attribution is: 2018 Report to the Nations. Copyright 2018 by the Association of Certified Fraud Examiners, Inc. About the ACFE Report to the Nations 79