Occupational fraud can be devastating to the financial health of organizations. Catching fraud early is essential for minimizing its impact on your organization.
In the Association of Certified Fraud Examiners’ (ACFE) Occupational Fraud 2024: A Report to the Nations (Report to the Nations), on average, a given organization will lose approximately 5% of its revenue to fraud. According to the ACFE, the longer a fraud scheme goes undetected, the greater the loss. A typical fraud scheme lasts about 12 months, but schemes that persist for years can lead to median losses of $875,000 (see Figure 7 below).
Why Does Fraud Go Undetected?
Understanding what allows fraud to persist is key to catching it sooner. A few factors that contribute to the longevity of fraud schemes include:
1. Insufficient Internal Controls
According to the Report to the Nations, in about 32% of cases, weak controls allowed fraud to go undetected, and in 19%, existing controls were bypassed. When essential controls do not exist or are not enforced, fraudsters can act without raising suspicion.
Relying on passive discovery alone can save money but is risky. While some passive methods like tip lines can be effective, fraud discovered through an unsolicited confession, by accident, or uncovered by law enforcement tends to last longer and result in higher fraud losses. Proactive measures, such as internal audits and data monitoring, can help reduce both duration and losses (see Figure 15 below).
2. Collusion
Collusion adds complexity to schemes and helps perpetrators evade detection. When people collude across departments, they can bypass controls that would typically block their attempted schemes, or at least, raise red flags. These schemes are also more costly since they can involve sophisticated cover-ups.
3. High-Level Perpetrators
Executives or senior employees are behind some of the highest-loss fraud incidents due to their access and authority, with median losses of $459,000. Higher-ups are better positioned to override controls, making it harder for others to detect and report their schemes. In organizations with poor leadership, executives and senior employees can use their authority to convince others that the rules don’t apply to them or bully subordinates into looking the other way.
Reducing Fraud Duration and Loss
Organizations can reduce the length and cost of fraud with a few proactive strategies:
1. Implement Internal Controls
Reinforcing internal controls, especially in sensitive areas of the organization, is essential. Regular supervisor review, enforced segregation of duties, and access limits may go a long way towards detecting fraud or can prevent it from happening in the first place. Weak or bypassed controls are at the root of over half of the fraud cases in the Report to the Nations.
2. Offer a Tip Line
Tips account for 43% of fraud discoveries, highlighting the importance of whistleblowing channels (see Figure 13 below). Offering anonymous tip lines and encouraging employees, vendors, customers and the public to report suspicious behavior improves early detection.
3. Ensure a Strong “Tone-at-the-Top”
Training employees to spot red flags and reinforcing ethical conduct are strong fraud deterrents. Organizations investing in fraud awareness training detect fraud more quickly and experience lower fraud losses (see Figure 28 below). A strong culture makes it harder for potential fraudsters to rationalize their behavior and empowers key participants in the internal control structure to push back on undue pressure to ignore control violations.
Are you confident in your organization’s ability to detect fraud before it gets out of control? Think about internal controls in your organization. Fraud that goes undetected costs more the longer it lasts. By reinforcing internal controls, encouraging reporting, and maintaining a culture of vigilance, organizations can reduce fraud duration and minimize losses. For more insights from this year’s Report to the Nations, visit legacy.acfe.com/report-to-the-nations/2024/.
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