Background: The Association of Certified Fraud Examiners (ACFE) conducts a bi-annual study on fraud investigations, the results of which get summarized in the ACFE Report to the Nation. The most recent report was issued in 2008 and revealed the following:
- U.S. organizations lose 7% of their annual revenues to fraud
- There is approximately $994 billion in fraud losses each year
- Fraud schemes typically last for at least 2 years before they are caught
- Corruption was the #1 scheme at 27% of all reported fraud cases
- False Billing was the #2 scheme at 24% of all reported fraud cases
- Frauds are most likely to be uncovered by a “tip” rather than any other method, including audit
- Roughly 38% of Frauds happened at small companies (>100 employees)
- Roughly 42% of Frauds happened at large companies (1,000+ employees)
- Roughly 39% of Frauds happened at Private Companies
- Roughly 28% of Frauds happened at Public Companies
- There is approximately $994 billion in fraud losses each year
- Fraud schemes typically last for at least 2 years before they are caught
- Corruption was the #1 scheme at 27% of all reported fraud cases
- False Billing was the #2 scheme at 24% of all reported fraud cases
- Frauds are most likely to be uncovered by a “tip” rather than any other method, including audit
- Roughly 38% of Frauds happened at small companies (>100 employees)
- Roughly 42% of Frauds happened at large companies (1,000+ employees)
- Roughly 39% of Frauds happened at Private Companies
- Roughly 28% of Frauds happened at Public Companies
What these statistics prove is while fraud may not happen at every company; no company is immune to fraud risk. As an inherent risk to business, fraud should be included in Enterprise Risk Management (ERM). Methods for managing and controlling the risk of fraud should include strategies for fraud prevention, fraud detection, and fraud deterrence.The Chief Audit Executive (CAE) must be involved in the organizational anti-Fraud strategy. As with other business risks the CAE should be assessing Fraud Risk and evaluating the effectiveness of the anti-Fraud strategies. Here is a sample list of strategies:
Fraud Prevention
- Anti-Fraud Tone at the Top
- Strong Corporate Governance and Internal Control Environment
- Policies and Procedures to reflect mindset and actions
- Hire ethical employees (Background checks, signed forms, etc.)
- Code of Conduct – signed by every employee
- Conflict of Interest Statement (employees and business partners)
- Strong Corporate Governance and Internal Control Environment
- Policies and Procedures to reflect mindset and actions
- Hire ethical employees (Background checks, signed forms, etc.)
- Code of Conduct – signed by every employee
- Conflict of Interest Statement (employees and business partners)
Fraud Detection
- Establish a Hotline
- Fraud Risk Assessment
- Fraud Penetration Study based on Schemes and Concealment Strategies
- Incorporate Fraud in every phase of an audit (SAS 99)
- Create/utilize a Red Flags Database
- Implement effective SOX Fraud Controls
- Data mine instead of sample testing
- Create a Toolkit including a resource roster of experts (Fraud expert, Investigator, Data mining, etc.)
- Continuously Monitor Transactions for possible Fraud
- Fraud Risk Assessment
- Fraud Penetration Study based on Schemes and Concealment Strategies
- Incorporate Fraud in every phase of an audit (SAS 99)
- Create/utilize a Red Flags Database
- Implement effective SOX Fraud Controls
- Data mine instead of sample testing
- Create a Toolkit including a resource roster of experts (Fraud expert, Investigator, Data mining, etc.)
- Continuously Monitor Transactions for possible Fraud
Fraud Deterrence
- Create an Internal Audit department
- Publicize Ethics Hotline
- Publicize Internal Fraud Cases and Punishment
- Publicize Continuous Monitoring Program
- Publicize Ethics Hotline
- Publicize Internal Fraud Cases and Punishment
- Publicize Continuous Monitoring Program
Vonya Global and the ACFE are not affiliated. Information in the opening paragraph is sourced from the ACFE 2008 Report to the Nation, which can be downloaded at the ACFE website.
