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Controlling For Fraud in Organizations

ACFE 2020 Report to the Nations on Occupational Fraud and Abuse

The 2020 Report to the Nations on Occupational Fraud and Abuse developed by the Association of Certified Fraud Examiners examined 2,504 cases of fraud in 125 countries causing $3.6 billion losses. The results are an eye-opener with respect to the nature and extent of fraud schemes; causes of fraud; reporting fraud and other data.

Fraud is a serious problem that can destroy the culture of an organization and lead to its downfall. Just think about Enron and WorldCom. The key to reduce instances of fraud is to develop an ethical culture that promotes responsibility, transparency, and integrity.

Companies that take fraud seriously have designated processes to deal with the reporting of fraud, such as a hotline, and engage employees in ethics training.

Here are some of the results of the survey.

  • The typical fraud case lasts 14 months and causes a loss of $8,300 per month.
  • Corruption was the most common scheme in every global region.
  • It’s estimated that organizations loss 5 percent of revenue to fraud each year, with a median loss per case of $125,000 and average loss per case of $1,509,000.
  • Asset misappropriation schemes are the most common type of fraud and the least costly with 86% of the cases and a median loss of $100,000.
  • Financial statement fraud schemes are the least common and most costly with 10% of the cases and a median loss of $954,000.

An important issue is how is fraud detected. Looking at occupational fraud – asset misappropriation --, the following are the top three methods of how occupational fraud was initially detected.

Tip                                              43%

Internal audit                          15%

Management review              12%

The results indicate that internal measures are most important in detecting fraud. Indeed, only 4% of the cases were identified by external audit.

Of interest is the finding that median losses doubled at organizations without hotlines: $198,000 compared to $100,000 with hotlines. This makes sense because a hotline is the primary form used to encourage tips and provides for a level of anonymity. Acfe

Whistleblowing is a controversial issue. Some believe that blowing the whistle is disloyal to the organization especially when it is made to an external party. Internal whistleblowing, on the other hand, is a widely-established step to report wrongdoing with the hope that the internal control systems will be reviewed and updated to mitigate against fraud and promote reporting within the organization.

An interesting finding is to whom did whistleblowers initially report. Here are selected results:

Direct supervisor                     28%

Fraud investigation team        14%

Internal audit                            12%

Executive                                    11%

Coworker                                    10%

Law enforcement/regulator     7%

Owner                                            7%

Board or audit committee         6%

It doesn’t seem as though organizations are taking fraud seriously. The problems are a lack of ethical leadership, systems that do not emphasize internal controls or the ease with which they can be overridden, and not involving the board or audit committee.

Both small and large organizations need to develop strong corporate governance mechanisms to ensure fraud is properly reported and acted upon. There should be a follow-up to check that the internal systems have been evaluated and needed changes made. Most important, the tone at the top should be set in a way that encourages internal reporting. Fraud needs to be corrected as soon as possible to send a clear message that a deviation from ethical standards won’t be tolerated.

Posted by Steven Mintz, aka Ethics Sage, on July 9, 2020. You can sign up for our newsletter and learn more about Dr. Mintz’s activities at: Follow him on Facebook at: