Occupational Fraud and Abuse: If You Aren’t Concerned, You Should Be

by Robert M. Greenwald

Jun 1, 1997

(TMA Global)

The Association of Certified Fraud Examiners recently released its 1996 Report to the Nation on Occupational Fraud and Abuse. The Report, also known as the “Wells Report,” was named after the Association’s founder and chairman, Joseph T. Wells, CFE, CPA, who created and initiated the study. This study is the largest known, privately funded study of its kind. The Report is the culmination of thousands of hours of research that details actual fraud and abuse cases totaling $15 billion contributed by 2,608 Certified Fraud Examiners (CFEs).

As a Life-Member of the Association, a CFE, and a contributor to the study, it is my pleasure to present some of the Report’s highlights, key findings, and conclusions.

The Report defines Occupational Fraud and Abuse as “The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” The cases described in the Report occurred principally over the last 10 years, reflect actual fraud and abuse losses ranging from $22 to $2.5 billion, and represent 12 different industry groups including government.

The Report provides the following findings/conclusions:

The Cost of Occupational Fraud and Abuse

The average organization loses more than $9 per day per employee to fraud and abuse. The average organization loses about 6% of its annual revenue to fraud and abuse committed by its own employees.

  • Fraud and abuse costs U.S. organizations more than $400 billion annually.
  • The median loss per case caused by males is about $185,000; by females, about $48,000.
  • The median losses caused by non-managerial employees were $60,000; by managers, $250,000; and by owner/executives, $1,000,000.
  • The median losses caused by perpetrators younger than 25 were $12,000; from 26-30 were $50,000; from 31-35 were $54,000; from 36-40 were $100,000; from 41-50 were $196,000; from 51-60 were $280,000; and over 60 were $346,000.
  • The median losses caused by high school graduates were $50,000; by college graduates were $200,000; and from post-graduates were $275,000.

The Perpetrators

Approximately 58% of reported fraud and abuse cases were committed by non-managerial employees, 30% by managers, and 12% by owner/ executives.

  • The typical perpetrator was a college-educated white male.
  • Men committed three-fourths of the offenses.
  • Median losses caused by men were nearly four times those caused by women.
  • Median losses caused by managers were four times those caused by non-management employees.
  • Median losses caused by executives were 16 times those of their employees.

The Victims

  • The most costly abuses occurred in organizations with less than 100 employees. The median loss for organizations with 100 or fewer employees was $120,000, nearly the same as that for organizations with more than 10,000 employees.
  • The education industry experienced the lowest median losses.
  • The highest median losses occurred in the real estate financing sector.

The Methods

The methods of fraud and abuse offenses include:

  • Asset misappropriation (80% of reported cases). Most involve cash or checking accounts. Other susceptible assets include inventory, supplies, equipment, and information.
  • Fraudulent statements (5% of reported cases).
  • Bribery and corruption (10% of reported cases). Most involve bribery, illegal gratuities, conflicts of interest, and economic extortion.

The Report makes 7 distinct conclusions:

  1. Certified Fraud Examiners consider the problem of occupational fraud and abuse to be very serious.
  2. There is a direct correlation between the employee’s age, sex, position, and the median loss due to fraud and abuse.
  3. Smaller organizations are the most vulnerable to occupational fraud and abuse.
  4. A lack of understanding of the nature of occupational fraud and abuse adds to its cost.
  5. Relatively few occupational fraud and abuse offenses are discovered through routine audits.
  6. The expanded use of computers in organizations likely will increase losses due to occupational fraud and abuse.
  7. The rate of occupational fraud and abuse likely will rise.

The Report makes the following recommendations:

1.  Understand the nature of fraud and abuse offenses, including:

  • Generally, occupational fraud and abuse starts small and continues to escalate.
  • Employers often are reluctant to believe that these offenses exist in their organizations.
  • Organizations must seek a balance between trusting employees too much and too little.
  • Although some offenses are well hidden, most are not.
  • Most occupational fraud and abuse can be detected and prevented with common sense and inexpensive solutions.

2.  Consult a Certified Fraud Examiner.

3.  Set the organizational tone regarding integrity and expectations at the top executive level.

4.  Have a written code of ethics.

5.  Check employee references.

6.  Examine the bank statements.

7.  Have a fraud and abuse hotline.

8.  Create a positive work environment.

As the Report to the Nation on Occupational Fraud and Abuse clearly indicates, fraud and abuse are pervasive problems, which—with some common sense procedures, planning, and enforcement—may be ameliorated.

 

Robert M. Greenwald
Bick-Fredman & Co.

Greenwald is based in Cleveland, Ohio, and may be reached at (216) 696-9860 or by fax at (216) 694-6860.


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