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FRAUD INVESTIGATION, PREVENTION AND DETECTION
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FRAUD INVESTIGATION, PREVENTION AND DETECTION DR. TAREQ FAYEQ OBAID BMC TRAINING
Introduction Fraud in general poses a massive threat to organizations of all types and sizes, in all parts of the world Occupational fraud committed against the organization by its own officers, directors, or employees, by the very people who were entrusted to protect its assets and resources. Among the various kinds of fraud that organizations might be faced with, occupational fraud is likely the largest and most prevalent threat.
Introduction • This definition is very broad, covering a wide range of misconduct by employees, managers, and executives. • Occupational fraud schemes can be as simple as pilferage of company supplies or as complex as sophisticated financial statement frauds. • All occupational fraud schemes have three key elements in common. The activity: • Is secret; • Is committed for the purpose of direct or indirect financial benefit ; and • Costs the employing organization assets, revenue or reserves.
Introduction • In 1996, the ACFE released the first Report to the Nation on Occupational Fraud and Abuse, which shed light on the massive costs that occupational fraud imposes on organizations. • The stated goals of the first Report were to: • Summarize the opinions of experts on the percentage and amount of organizational revenue lost to all forms of occupational fraud and abuse; • Examine the characteristics of the employees who commit occupational fraud and abuse; • Determine what kinds of organizations are victims of occupational fraud and abuse; and • Categorize the ways in which serious fraud and abuse occurs.
Introduction In 2018 They released updated edition, the edition was based on detailed case information about specific frauds provided by the CFEs This study contains an analysis of 2,690 cases of occupational fraud that were investigated between January 2016 and October 2017. 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. .
Introduction These frauds were committed by 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 below shows the number of cases from nine key geographical regions, along with the median loss per fraud in each of those regions.
Countries With Reported Cases And Median Loss For Each Region
Countries With Reported Cases And Median Loss For Each Region
Countries With Reported Cases And Median Loss For Each Region
The Cost Of Occupational Fraud • 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.
The Cost Of Occupational Fraud The total loss caused by the cases in the study exceeded USD 7.1 billion, which is also an huge amount when considering how much damage such a loss represents to most organizations. They examined 2,690 cases of occupational fraud that were investigated over the last two years. The median dollar loss caused by these schemes was $130,000. As the following chart clarify, nearly one-fourth of the cases in their study caused losses of $1 million or more. There were some cases with reported losses of at least $1 billion.
How Occupational Fraud is Committed What methods do fraudsters use to commit their schemes? As was first stated in the 1996 Report to the Nation, all occupational frauds fall into one of three major categories: • Asset misappropriation • Corruption • Fraudulent statements
Categories of Occupational Fraud • Asset misappropriations were the most common type of occupational fraud in our study, occurring in over 89% of all 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 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.
How Occupational Fraud is Committed It is important to note that within a given occupational fraud scheme, the perpetrator will often engage in several different forms of illegal conduct. Thus, a single occupational fraud scheme might involve elements of each of the three major categories. The following table clarify the distribution of cases based on the categories of fraud that were committed.
How often do fraudsters commit more than one type of occupational fraud?
How fraudsters commit more than one type of occupational fraud? Overall, 23% of the cases in the study involved more than one category of fraud. The most notable correlation between two categories was the strong tie between corruption and asset misappropriation schemes. As we see, 9% of the corruption cases also involved an asset misappropriation of some sort. (23% of cases were classified as corruption and asset misappropriation, plus 4% of cases involved all three categories.) A typical example is a case in which an employee accepts kickbacks from a vendor in order to process invoices for false goods or services. This type of fraud clearly involves an element of corruption (the acceptance of a bribe), but also involves an element of asset misappropriation as well (causing the victim organization to issue payment for non existent goods or services).
Duration of Fraud Schemes There is obviously great benefit in detecting fraud schemes as close to their inception as possible, including the ability to limit the financial and reputational damage caused by the crime. Analyzing the duration of the occupational frauds reported to us can provide insight into areas of opportunity for organizations to increase their fraud-detection effectiveness. The average duration the amount of time from when the fraud first occurred to when it was discovered for all cases in our study was 16 months. However, the duration of cases in each category of fraud ranged from 6months (for non-cash schemes) to 60 months (for payroll schemes).
Detection of Fraud Schemes Understanding the right methods by which occupational frauds are detected is critical for both investigating schemes and implementing effective prevention strategies. Frauds are much more likely to be detected by tips than by any other method.
Detection of Fraud Schemes The initial detection of a fraud scheme is often the most crucial moment in the fraud examination process, decisions must be made quickly to secure evidence, reduce losses and execute the best investigation strategy available. The method by which a fraud is uncovered can open or close several options for an organization. For instance, the outcome of a case might be different if the first time management learns of an alleged fraud is through an unknown tip, as opposed to a law enforcement action. Moreover, analyzing the means by which organizations detect instances of fraud gives us insight into the effectiveness of controls and other anti-fraud measures.
Initial Detection of Occupational Frauds Figure below 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 2010. Collectively, these three detection methods were cited in 68% of the cases in the 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.
Median Loss by Detection Method results indicate that there is a correlation between the way in which occupational fraud schemes are detected and the gravity of the fraud. More importantly, the data points to steps organizations can take to detect fraud proactively and, in doing so, reduce losses. Figure below clarify the median loss and median duration for all cases, based on the method by which they were detected. They grouped each of these detection methods into three categories: active, passive, or potentially active or passive. Active detection methods involve a deliberate search for misconduct from someone within the organization or an internal control designed to detect fraud. Passive detection methods refer to cases in which the organization discovers the fraud by accident, confession, or unsolicited notification by another party. tips and external audit classified as potentially active or passive detection methods because those mechanisms might or might not involve proactive efforts specifically to identify fraud.
Median Loss by Detection Method 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. 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 monitoring.
Detection of Fraud Schemes Source of Tips Figure below shows that 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. this data suggests organizations should also consider promoting reporting mechanisms to outside parties, especially customers and vendors. Addition-ally, 14% of tips came from an anonymous source, demonstrating that a significant portion of those who reported fraud did not want their identities known.
Detection of Fraud Schemes Impact of Hotlines The presence or absence of a reporting hotline has an interesting impact on how frauds are discovered. Organizations with some form of hotline in place saw a much higher likelihood that a fraud would be detected by a tip (46%) than organizations without such a hotline (30%). More than 11% of frauds in organizations without hotlines were caught by accident, whereas less than 3% of cases were detected by accident in organizations that had implemented a hotline. Similarly, external audit was the detection method for 6% of cases from organizations without hotlines, but only 1% in organizations with hotlines.
Victim Organizations Type of Organization As shown in the Figure below, more than 70% of the frauds in the study occurred at for-profit organizations, with 42% of the victim organizations being private companies and 29% being public companies. The private companies in the 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 organizations, 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, researcher broke down the government fraud cases in this 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 below).
Size Of An 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 organizations typically have more resources to invest in their anti-fraud programs, as well as ability to separate duties among staff members to help prevent fraud Fraud can be especially destructive to small businesses. These organizations have fewer resources to both prevent and recover from a fraud. Researcher analyzed the cases reported based on the number of employees at the victim organization. Figure below 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).
How does an organization’s size relate to its occupational fraud risk?
Industry of Organization The frauds in this study were spread over a wide range of industries. The most common were banking and financial services (338 cases); government and public administration (184cases) and manufacturing (201 cases). 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 will provides a heat map showing the relevant risk for each category of occupational fraud in every industry that had at least fifty reported cases in this study.
Banking & Financial Services Banking & Financial Services • Not surprisingly, two of the three most common schemes in the banking and financial services industry were cash larceny and skimming. • These schemes generally involve the physical theft of incoming cash and cash on hand (for example, in a vault). • Among the 78 cash on hand cases in this industry, the most common type of scheme involved the Corruption with 122 cases.
Industry of Organization Manufacturing • Approximately half of the cases reported from the manufacturing industry involved corruption. Billing and non-cash schemes each also occurred in more than one-fourth of the cases in this industry. Government and Public Administration • corruption 50%and non-cash 22%theft were the most commonly reported forms of asset misappropriation in the government and public administration sector, corruption 50%and non-cash 22%theft of the 184 cases.
Industry of Organization Health Care • Corruption and Fraudulent billings were also the most common type of fraud reported among the 149 cases they received from the health care industry. • Corruption occurred 54 cases and False billings occurred in one-fourth of health care cases. Retail • Non-cash theft was the most commonly reported type of fraud in the retail industry. These schemes typically involved the theft of goods from warehouses and sales floors. • Corruption and cash on hand were both cited in over 20% of the retail cases as well.
Industry of Organization Education • Corruption and Billing fraud was the most common type of asset misappropriation identified in the 96 cases we received from the education industry, followed by non-cash theft, cash on hand, and larcany cash. Insurance • Corruption occurred 45% and Fraudulent billings occurred in nearly 20% of the insurance industry cases we reviewed.
