Only a small percentage of employees worldwide engage in fraud, but the global cost of fraudulent activities is trillions of dollars. With regulatory expectations on the rise for companies worldwide to bolster their internal controls processes and systems, the fight against corporate fraud has never been more critical.

The Association of Certified Fraud Examiners’ Occupational Fraud 2022: A Report to the Nations outlines how fraud impacts companies around the world and across industries and the most effective measures businesses can take to protect themselves from fraudulent activities. The ACFE report analyzes input from more than 2,000 corporate fraud cases involving companies hailing from 133 countries across 23 industries. The cases examined in the report resulted in more than $3.6 billion in losses and caused companies to lose 5 percent of their revenue on average.

Though fraud is a pervasive issue for companies worldwide, the ACFE report outlines several policies, procedures, and practices that companies can use to detect and manage fraudulent activities proactively.

4 Key Takeaways from the
2022 ACFE Report

1. Not All Fraud Schemes are Equal

To combat corporate fraud, it’s essential for companies to understand the different forms that fraud can take. The ACFE report breaks down the most common kinds of fraud and reviews the costliest frauds for companies. Understanding this data can help compliance teams determine where their attention and resources need to be directed to proactively detect fraud and where to begin investigating cases made on hotline reports.

The report centers on occupational fraud, which is defined as frauds that individuals commit against the organizations that employ them. Occupational fraud is divided into three categories:

• Asset misappropriation: stealing or misusing resources.

• Corruption: bribery, conflicts of interest, and extortion.

• Financial statement fraud: an employee deliberately provides false information or omits critical information on a financial statement.

The report notes that asset misappropriation is the most common form of fraud by a significant margin: 86 percent of reported cases fell into the category. Asset misappropriation caused the lowest median losses, averaging around $100,000 per case. 

Though financial statement fraud schemes were the least common and only constituted 9 percent of reported cases, they were the costliest and caused average losses of $593,000. Around 50 percent of reported cases involved corruption, which caused average losses of $150,000. The report also notes that fraudsters frequently engage in multiple forms of occupational fraud and do not limit themselves to one kind of stealing.

Understanding how frauds in each of the categories mentioned above are committed and which kinds of fraud pose the highest risk for a company can help compliance teams determine if their company has appropriate controls and tools in place. For example, asset misappropriation occurs if an employee falsified expenses or disbursements, makes fraudulent write-offs or receivables, or engages in other forms of fraudulent activity to siphon corporate assets for personal benefit. An employee could perform financial statement fraud by understating revenues, improperly disclosing income, or concealing liabilities and expenses, among other things.

With all of this in mind, compliance teams should consider whether their company has safeguards and tools to prevent these forms of fraud. An example of this is data-driven compliance software. Modern compliance solutions have features such as continuous transaction monitoring, which automatically tracks spending and quickly detects financial anomalies more accurately than manual processes.

2. Frauds Can be Concealed in Different Ways

The 2022 ACFE report breaks down the different ways that fraudsters conceal their activities. The top five concealment methods used by fraudsters are:

• Creating fraudulent physical documents

• Altering physical documents

• Creating fraudulent electronic documents or files

• Modifying electronic documents or files

• Destroying or withholding physical documents

Given that over half of the cases the ACFE report analyzed involved creating fraudulent evidence, having policies and procedures in place to detect any fraudulent evidence should be a top priority for companies. This is another example where data-driven compliance tools can benefit an organization: Traditional approaches to compliance center on subjective risk assessments and sample-based audits, which can easily fail to determine whether data in a given financial document, such as an invoice or expense report, is fraudulent. On the other hand, data-driven compliance software allows compliance professionals to analyze company documents on an ongoing basis, allowing them to quickly identify risks and focus their time and energy appropriately.

Another benefit of taking a data-driven approach to compliance is that such an approach can detect fraud concealment more quickly than traditional methods, such as waiting for a hotline report to come in. The ACFE report notes that occupational fraud is often detected via hotline tips. Though hotlines are an essential part of a company’s compliance apparatus, the report notes that it takes an average of 12 months for a tip to be reported. 

This delay is a point of particular concern for companies since the longer a fraud goes undetected, the greater the financial loss and risk that the misconduct has spread within the organization. Therefore, companies must ensure that their compliance teams have tools to proactively detect fraud and quickly resolve issues before they become systemic. As more companies incorporate such real-time transactional monitoring, one can expect that the percentage of frauds discovered through hotline reports will decrease along with the average number of months to identify such frauds.

3. Specific Departments and Employees are More Likely to Commit Fraud

Fraudulent activity isn’t limited to a specific kind of employee or company department. Therefore, compliance teams must recognize the relative risks that specific departments and categories of employees can pose to ensure that anti-fraud resources are allocated effectively.

The ACFE report notes that though owners and executives only committed 23 percent of the frauds in the organization’s study, the $337,000 median loss in those cases was higher than fraud cases committed by managers, who in turn caused more damage via fraud than staff-level employees. Furthermore, the frauds committed by higher-level perpetrators took longer to detect, which the report attributes to their ability to intimidate lower-level employees and evade or override controls that would otherwise detect fraud.

As for which departments are likely to be the source of fraud, the report notes that operations, accounting, sales, and executive and upper management were the sources of more fraud cases than other departments. Of those departments, accounting and executive and upper management caused the highest median losses of $155,000 and $500,000 per case, respectively.

The ACFE report provides several examples of behavioral red flags that compliance teams can consider if they suspect an individual is committing fraud. The most common red flag is an employee living beyond their means, which was cited in 39 percent of cases. An employee experiencing financial difficulties accounted for 25 percent of cases, followed by an employee having an unusually close association with a vendor or customer, which was cited in 20 percent of cases.

4. Anti-Fraud Controls Can Help Mitigate the Damage Fraud Causes

No company is completely immune to fraud, but there are measures that companies can take to mitigate the risk of fraudulent activity occurring. The 2022 ACFE report cites 18 common anti-fraud controls companies use to detect and prevent fraudulent activity.

The control that provides companies with the highest reduction in median losses to fraud is job rotations and forced vacations, which reduced median losses by 54 percent, followed by hotlines and surprise audits, which reduced median losses by 50 percent. Proactive data monitoring and analyses offered a 47 percent reduction, while anti-fraud policies, employee fraud training, and formal fraud risk assessments all reduced median losses by 45 percent.

Most of the controls mentioned above were also effective at reducing the time it took for companies to detect fraud. Proactive data monitoring and analyses reduced the duration of fraud by 56 percent, followed by surprise audits and job rotations, and mandatory vacations, which reduced the duration by 50 percent, while formal fraud risk assessments and having a dedicated fraud department or team reduced the duration by 44 percent.

The 2022 ACFE report also notes that many of the most effective anti-fraud controls were not present in most cases. For example, proactive data monitoring and analyses were only present in 45 percent of cases, while surprise audits were only present in 42 percent of cases. 

With all of this in mind, compliance teams need to consider having multiple controls to protect their companies from fraudulent activities. For example, a company that solely relies on hotline reports will be unable to respond to fraudulent activity quickly. However, if a company uses proactive data monitoring and analyses, such as a data-driven compliance program alongside hotline reports, they are better positioned to root out fraud before it becomes systemic.

FAQs

What is the cost of fraudulent activities?

Only a small percentage of employees worldwide engage in fraud, but the global cost of fraudulent activities is trillions of dollars.

What is occupational fraud?

Frauds that individuals commit against the organizations that employ them.

What are the concealment methods used by fraudsters?

The top five concealment methods used by fraudsters are:

• Creating fraudulent physical documents

• Altering physical documents

• Creating fraudulent electronic documents or files

• Modifying electronic documents or files

• Destroying or withholding physical documents