From Corporate Giants to Main Street, Fraud is on the Rise
Investors, analysts and corporate directors rely on external audits to keep companies honest. But a new study says audits are woefully ineffective at uncovering fraud. In fact, more than twice as many frauds are uncovered by accident. This is a finding in the "Report to the Nations on Occupational Fraud and Abuse" study released Tuesday by the Association of Certified Fraud Examiners, which bills itself as the world's largest anti-fraud organization.
"You can't put the onus on somebody else to keep your place clean," said ACFE faculty member Evy Poumpouras, a former U.S. Secret Service agent. She said internal controls can be much more effective in uncovering fraud—and preventing it in the first place.
The study examined 1,483 cases of fraud as reported by the Certified Fraud
Examiners who investigated them.
"The analysis of these cases provides valuable lessons about how fraud is committed, how it is detected and how organizations can reduce their vulnerability to this risk," wrote ACFE President James Ratley in the report's introduction. Read
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The report estimates the typical organization loses five percent of its revenue each year to fraud. That would work out to a global impact of $3.7 trillion, the report says. But as staggering as the figure might seem, Poumpouras says she is not surprised. "There are so many more cases that we don't know of," she said.
Nearly half of the fraud cases studied were in the United States, where anti-fraud controls tend to be the strictest. But the biggest losses were in Eastern Europe and
Western and Central Asia. The median loss in those regions was $383,000, compared to $100,000 in the U.S.
Employees and middle managers committed the lion's share of fraud, with owners and senior executives accounting for just 19 percent of the cases. But perhaps unsurprisingly, the study noted that the higher-ranking the fraudster was, the greater the losses.
Regardless, financial fraud is particularly difficult to uncover, Poumpouras said, because the perpetrators have less of an emotional connection to what they are doing than they do for other types of crime.
"Usually you are not touching money. You're fudging documents. It feels less real," said Poumpouras, who has been involved in many financial fraud investigations. "Getting people to confess to financial crime is more difficult than getting them to confess to murder," she said, which may help explain why audits can be so ineffective. The study says auditors detected just 3 percent of the fraud cases reported last year, compared to 7 percent uncovered by accident.
"While independent audits serve a vital role in organizational governance," the report says, "our data indicates that they should not be relied upon as organizations' primary anti-fraud mechanism."
Instead, the study recommends what it calls "proactive detection measures"…