Occupational fraud is very likely the costliest and most common form of financial crime in the world according to the 2022 Report to the Nations issued by the Association of Certified Fraud Examiners (ACFE). The report states that “even with the shift toward digital payments, remote work environments, and technology-based organizations, the schemes and methods fraudsters use to commit occupational fraud remain consistent over time”.
The report highlights the three categories of occupational fraud:
Asset misappropriation: the most common occupational fraud (86% of cases) which involves an employee stealing or misusing the employer’s resources with a median loss at $100,000 per case (the lowest median loss of the categories)
Financial Statement Fraud: this involves a perpetrator intentionally causing a material misstatement or omission in an organization’s financial statements (the least common at 9% of schemes). This is the costliest scheme with a median loss of $593,000.
Corruption: this includes bribery, conflicts of interest, and extortion with a median loss of $150,000.
Asset misappropriation is the use of property or funds of another person for an unauthorized purpose and is classified as a felony. In misappropriation, the perpetrator steals or misuses an organization’s belongings and resources, usually without force. Meaning, they are taken through trickery and deceit. The report analyzed over 2,000 occupational fraud cases and found the following asset misappropriation schemes to pose the greatest risk:
Check and payment tampering
Cash on hand
Examples of misappropriation schemes include:
A company vendor calling to inquire about the status of an invoice, but the company’s accounting records show that the invoice has already been paid
Checks that have cleared the bank but not recorded in the accounting system are identified
Physical evidence that checks have been altered
Cancelled checks are missing
Alterations to vendor invoices
Unexplained changes in bank deposit slips
Physical removal of company’s assets
Lower than expected company gross revenues
Lower than expected company net profit
Higher than expected mileage costs
Higher than expected travel and entertainment costs
Processing false merchandise returns
The report highlights that the rise of blockchain technology plus the adoption of crypto has opened the door for individual to perpetrate crypto fraud. According to the report, the most common ways that crypto was used fraudulently include:
48% in making bribery and kickback payments in cryptocurrency
43% in converting misappropriated assets to cryptocurrency
Managing fraud risk proactively is imperative
It is not only about protecting against financial losses commonly associated with fraud. It is also about surviving reputational risk. There is a need for organizations to create an environment and implement appropriate controls for detecting fraud ahead of time. An increasing “perception of detection” is widely believed to be the most effective fraud prevention method within an organization. Directors, officers, and employees in an organization should ask themselves if what they are doing is legal, is it something permitted/encouraged in the organization and what could happen if the information goes public.
The ACFE recommended for employers to have hotlines or other ways for employees to report fraud. They also should be trained in what to look for, such as employees living beyond their means, with fast cars, jewelry and fancy vacations, and how to report their suspicions.