Global Study Finds Billions in Fraud Losses

According to a new global fraud study, total fraud losses worldwide exceed $6.3 billion. By all measures, that’s a heavy degree of loss to fraud, corruption, bribery and other types of financial crimes.

The survey also found that asset misappropriation is the most common form of occupational fraud – though such cases are the least damaging (with a median loss of $125,000 per case). Financial statement fraud – the type of fraud that befell Enron and Worldcom, for example – is least common, but costs companies the most with a median loss of nearly $1 million per case.

Corruption cases fall squarely in the middle – making up just more than a third of cases in the study, and causing a median loss of $200,000.

The findings were published in the ACFE’s bi-annual Report to the Nations on Occupational Fraud and Abuse. This year, the ACFE received information from CFEs regarding 2,410 fraud cases that were investigated during the past year.

While there are a number of interesting findings – many of which we will explore in future blog posts – there is one that should stand out for business owners everywhere. Fraud detection early in a case is so important, as the longer the clock is ticking the more money it will cost the organization:

The longer a fraud lasted, the greater the financial damage it caused. While the median duration of the frauds in our study was 18 months, the losses rose as the duration increased. At the extreme end, those schemes that lasted more than five years caused a median loss of $850,000.

Five years! It seems amazing that a fraud scheme can last so long, but perhaps not surprising when you consider how many companies are lacking sufficient internal controls designed to detect and prevent fraud. The problem is especially prevalent in smaller companies. Indeed, the report examines internal controls by organization size:

Small organizations had a significantly lower implementation rate of anti-fraud controls than large organizations. This gap in fraud prevention and detection coverage leaves small organizations extremely susceptible to frauds that can cause significant damage to their limited resources.

So, frauds are allowed to continue unchecked in some instances, and they tend to grow bigger as fraudsters feel more brazen, and comfortable that they won’t be detected. In fact, at various anti-fraud conferences, we’ve heard from ex-fraudsters who have described schemes that lasted 6, 8 or even 10 years. By then, they’ve robbed their company blind – and sometimes the only thing that stops them is the company going out of business (or filing bankruptcy).

Another important factor in a fraud is how many people are perpetrating it. The study found that as the number of participants in a fraud increases, so do fraud losses. As the study notes:

  • The median loss caused by a single perpetrator was $85,000
  • When two people conspired, the median loss was $150,000
  • Three conspirators caused $220,000 in losses
  • Four caused $294,000 in losses
  • For schemes with five or more perpetrators, the median loss was $633,000

Studies like this Report are important in understanding the threat and impact of fraud, and they help us benchmark trends and problem areas that need attention. Business owners and directors would be wise to take heed of the statistics, since they can provide guidance in efforts to put controls in place that will help prevent and detect more fraud in the future.