The Association of Certified Fraud Examiners calls occupational fraud a “financial iceberg” where some of the losses are clearly visible and others are hidden below the surface.
No one really knows how much occupational fraud is never discovered. But of the theft that has been brought to light, the median loss to a victim organization in the United States is $100,000. And, one-fifth of the fraud committed in the American workplace involves losses of more than $1 million.
Worldwide, the median loss is even higher – $145,000 per occurrence and $3.7 trillion overall, according to the Association of Certified Fraud Examiners (ACFE) newly released 2014 report.
If that’s not bad enough, most of the companies that are victims never get any of the money back. More companies in the latest ACFE biennial report did not recover any of their losses – 58 percent compared to 49 percent in 2012.
Only 14 percent make a full recovery, and just 9 percent recover more than half. About 19 percent get some of their losses back, but less than half.
Civil suits were filed in about one-fifth of the cases. Of those cases that have been resolved, about half won, one-third settled and 14 percent of the cases were found in favor of the alleged perpetrator.
Fewer cases were referred to law enforcement than in previous years – just 61 percent.
Interestingly, of those cases that were prosecuted, only 1 percent of the accused were acquitted. More than half pleaded guilty or no contest, and 18 percent were convicted at trial. In another 18 percent of cases, the victim organization declined to prosecute.
The reasons given most by victims for not reporting the crime to law enforcement or declining to prosecute were:
| Fear of bad publicity | 35% |
| Sufficient internal discipline | 31% |
| Private settlement | 21% |
| High cost | 19% |
| Other | 13% |
| Lack of evidence | 11% |
| Civil suit | 5% |
| Perpetrator’s disappearance | 1% |
Clearly, the best way to protect your organization’s earnings from being lost to employee fraud is to prevent the fraud in the first place. Small businesses are particularly vulnerable because they don’t have as many fraud deterrents in place and a major theft can put them out of business.
The ACFE recommends that businesses and nonprofit organizations take proactive steps to protect themselves from employee fraud. Too many organizations mistakenly rely on their annual external audit, the association said, but external audits were found to be one of the least effective controls for fraud detection.
“While independent audits serve a vital role in organizational governance, our data indicates that they should not be relied upon as organizations’ primary anti-fraud mechanism,” the ACFE report said.
Proactive means of fraud prevention include data monitoring and analysis, surprise audits, regular management reviews and implementation of strong internal controls to prevent fraud, such as job rotation and mandatory vacations.
Tips – in particular employee tips – are the No. 1 way occupational fraud is discovered. Implementation of an anonymous hotline that allows employees, customers and vendors to report suspected fraud has proven to be one of the best deterrents to fraud in the workplace.