Occupational fraud is a type of fraud that occurs in businesses and includes asset misappropriation and financial statement fraud. Asset misappropriation is the misuse of an organization’s resources by its employees while financial statement fraud is the intentional misrepresentation of the organization’s financial statements by the organization to third parties.
According to the 2024 Report to the Nations provided by the Association of Certified Fraud Examiners (ACFE), 89 percent of occupational fraud is due to asset misappropriation while only 5 percent is due to financial statement fraud. Although financial statement fraud was a lower percentage of cases it had median losses of $766,000 which was over 6 times the median loss for asset misappropriation. The report also noted that the median duration for occupational fraud schemes was 12 months before detection and the longer the fraud went undetected the higher the losses.
Fraud Prevention Tip 1: Reduce Detection Time
Monitor Regularly: Fraud schemes often go undetected for an average of 12 months. Implement regular and unexpected audits or reviews to detect and address fraud early.
Act Swiftly: The longer fraud remains undetected, the greater the potential losses. Ensure prompt and thorough investigation of any suspicious activity.
With the prevalence of occupational fraud more organizations have implemented measures to help prevent and detect fraud. The main ways occupational fraud was detected were tips (43 percent), internal audit (13 percent), and management review (13 percent).
Many organizations use hotlines where employees, customers and vendors can give tips anonymously. There are different types of hotlines including telephone, email, and web-based. Email and web-based hotlines were used more in 2023 compared to telephone hotlines. Regarding tips the report noted that employees reported 52 percent of the frauds while customers accounted for 21 percent and vendors accounted for 11 percent. Although tips, internal audit and management review made up the majority of ways fraud was detected in the cases, the most common anti-fraud controls were Code of Conducts and external audit of financial statements.
Fraud Prevention Tip 2: Utilize Hotlines to Encourage Reporting
Set up a Hotline System: Implement telephone, email, and web-based hotlines to receive anonymous tips.
Make it Easy: Actively promote its use to ensure employees and stakeholders can easily report suspicious activities.
The report also looked at the change in median loss when a control was in place and when it was not. The controls with the highest percent reduction in loss when implemented included surprise audits, management review, and external audit which reduced the loss over 50 percent.
Fraud Prevention Tip 3: Implementing Anti-Fraud Controls
Conduct Surprise Audits: Regular, unannounced audits can cut potential fraud losses by over 50%.
Implement Regular Management Reviews: Regular reviews by management are crucial for minimizing losses from fraud.
Schedule External Audits: External audits are effective in significantly reducing the risk and impact of fraud.
The report also showed the importance of implementing fraud training for all levels. When fraud awareness training was provided to both employees and managers the median loss was $100,000 while when no training was provided the median loss was $199,000. Also, with fraud awareness training, tips were twice as likely to come from employees. In terms of the types of organizations that provided training the public sector had the highest percentage at 83 percent for employee training and 82 percent for manager training while nonprofits had the lowest percentage of training at 52 percent for employees and 49 percent for management. Also noted for nonprofit organizations when awareness training was provided frauds were detected in 9 months compared to 24 months with no training.
Fraud Prevention Tip 4: Fraud Awareness Training
Conduct Comprehensive Fraud Awareness Training: Provide training for both employees and managers to reduce the chance of fraud. Training will enhance awareness and increase detection capabilities.
Increase Employee Reporting through Training: Encourage employees to report suspicious activities by integrating fraud awareness training, which can double the likelihood of receiving actionable tips from employees
Anti-fraud controls also vary based on the size of the organization. Small businesses, organizations with less than 100 employees, had less anti-fraud controls than businesses with more than 100 employees. The difference between implementation of different anti-fraud controls between small and larger businesses ranged from 6 percent for rewards for whistleblowers and 52 percent for hotlines.
As the report mentioned, small businesses and not for profit organizations have implemented less anti-fraud controls compared to larger organizations and sectors. It is important for all organizations to mitigate the risk of fraud and especially not for profit organizations where there is often more internal control weaknesses due to size.
Some important anti-fraud controls all Organizations should implement are fraud awareness training, hotlines, and management review as these are easy to implement, make up the majority of detection in cases, and can reduce the loss of potential fraud schemes. Occupational fraud occurs in all different types of businesses and can be very costly. Organizations should use different controls to prevent, detect, and correct fraud schemes.
To learn more about occupational fraud and the statistics related to it please visit the ACFEs 2024 Report to the Nations.
Protect Your Organization from Fraud
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