Fraud Prevention: How to Lower the Costs of Occupational Fraud

Did you know that the typical organization loses 5% of its revenues every year to fraud.

Occupational fraud is a universal problem for businesses around the globe, according to the Association of Certified Fraud Examiners (ACFE). The ACFE is holding Fraud Awareness Week around the world November 16-22.

ACFE’s recently released 2014 Report to the Nations on Occupational Fraud and Abuse is a close-up look at costs and trends related to occupational fraud. This is when an employee or contractor defrauds his or her employer.

The potential fraud loss around the world is close to $3.7 trillion (based on the average 5% loss and the 2013 estimated Gross World Product).

The median loss in the study caused by a single case of occupational fraud was $145,000; 22% of the cases involved losses of at least $1 million.

The longer frauds last, the more financial damage they do. On average it took 18 months for a fraud incident to be detected. But many fraud schemes are never detected or may occur for years before they’re found out.

There are substantial indirect costs associated with fraud including lost productivity, damage to reputation, loss of business, and expenses associated with attempting asset recovery.

The costs of fraud are related to different types of fraud. Misappropriation of Assets fraud occurs in 85% of cases and costs the least – about $130,000 per loss. Financial statement fraud, which occurs in 9% of cases, costs the most - a median loss of $1 million.

Organizations with hotlines had 41% less costly frauds and detected frauds 50% more quickly.

The more people involved in a fraud incident, the higher the losses. The median loss in a fraud committed by a single person was $80,000. With two perpetrators, the median loss was $200,000; for three, it was $355,000 and when four or more perpetrators were involved the median loss exceeded $500,000.

Recovery statistics are troubling. The ACFE report showed that 58% of victim organizations had not recovered any of their losses; only 14% had made a full recovery. 

Industry experts encourage fraud prevention strategies and proactive fraud detection measures to help lower the cost of fraud. Here’s a checklist:

• Develop comprehensive information security best practices.
• Establish an anonymous tips line.
• Implement management review procedures, internal audits, and employee monitoring.
• Set up data monitoring and analysis as well as surprise audits, a dedicated fraud department or team, and formal fraud risk assessment.
• Use the latest technology to protect networks and computers.
• Limit access. Only authorized personnel should handle confidential documents.
• Create a retention policy. Clearly mark a destruction date on all records in storage.   
• Provide regular employee training.
• Use secure and documented paper shredding services. Implement a shred-all policy so all documents that are no longer needed are put into locked consoles for secure document shredding. 
• Talk to your shredding services provider about hard drive destruction – wiping a hard drive is not a guarantee that information cannot be recovered.

Learn more about how to protect your business from fraud.