by Robert M. Greenwald
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
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
The Report provides the following
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
- 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
median losses caused by high school graduates were $50,000; by college
graduates were $200,000; and from post-graduates were $275,000.
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
- 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.
losses caused by executives were 16 times those of their
- 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
highest median losses occurred in the real estate financing sector.
The methods of fraud and abuse
- 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).
and corruption (10% of reported cases). Most involve bribery, illegal
gratuities, conflicts of interest, and economic extortion.
The Report makes 7 distinct
- Certified Fraud Examiners consider the problem of
occupational fraud and abuse to be very serious.
- There is a direct correlation between the employee’s
age, sex, position, and the median loss due to fraud and abuse.
- Smaller organizations are the most vulnerable to
occupational fraud and abuse.
- A lack of understanding of the nature of occupational
fraud and abuse adds to its cost.
- Relatively few occupational fraud and abuse offenses
are discovered through routine audits.
- The expanded use of computers in organizations likely
will increase losses due to occupational fraud and abuse.
rate of occupational fraud and abuse likely will rise.
The Report makes the following
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.