Occupational Fraud - the Audit as Deterrent: Who Better to Teach CPAs How to Spot Fraud Than the Perpetrators?
There's good news to be had: Audited companies suffer less severe fraud losses than unaudited ones, and the overall rate of occupational fraud hasn't changed much in the last six years. Those conclusions come from the "2002 Report to the Nation on Occupational Fraud and Abuse," issued by the Association of Certified Fraud Examiners (ACFE). From actual case studies taken from the report, auditors and their clients will learn the methods used by employees and insiders to commit occupational fraud and what can be done to better detect and deter these offenses. The report defines occupational fraud as "the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets." The breadth of this definition includes a wide range of misconduct by executives, managers and employees of organizations ranging from sophisticated investment swindles to petty theft. The report, based on questionnaires mailed to some 10,000 certified fraud examiners (CFE), details 971 fraud cases. The CFEs typically fall into two broad groups: investigators and auditors. They are employed mainly in three sectors: government, business and public accounting (in that order). The average CFE has been involved in the audit or investigation of more than a hundred cases of alleged fraud. The survey covered four categories: the cost of fraud, the methods used, the perpetrators and the victims. This article will cover only highlights; the complete report can be viewed at www.cfenet.com. THE COST OF FRAUD Determining how much fraud actually costs the American economy is difficult, if not impossible, because not all fraud is detected or reported. Moreover, no organization is charged with accumulating comprehensive data, and few studies have been conducted. Even in the current ACFE report, I want to caution the reader that any estimates regarding the cost of fraud are subjective and that the survey focused only on occupational fraud. Figures show that about 6% of revenues, or $600 billion, will be lost in 2002 as a result of occupational fraud and abuse (see graphic, "Occupational Fraud Losses," page 24). Although this is a $200 billion increase since 1996, when compared with the $3 trillion rise in the gross domestic product (to $10 trillion from $7 trillion) during the same period, it is evident the rate of occupational fraud appears to be unchanged. Exhibit 1, above, shows that nearly half of the cases studied had losses in excess of $100,000; 16% of the cases had losses greater than $1 million. [GRAPHIC OMITTED] THE METHODS A major goal of the survey was to determine precisely how fraud was accomplished and to classify the offenses by the methods used to commit them. In the ACFE's first survey, "Report to the Nation on Occupational Fraud and Abuse," published in 1996, the association found there were three principal illegal schemes committed against organizations: asset misappropriations, corruption and fraudulent statements. Asset misappropriations are still by far the most common and least expensive of the three schemes, accounting for more than 80% of the cases studied. Exhibit 2, at right, compares the frequency and losses of the three main categories in 1996 and in 2002. As can be seen, the methods, their frequency and costs have--for the most part--remained somewhat stable. Within those broad categories, there are a number of principal schemes (see exhibit 3, page 26). THE PERPETRATORS Current data create the following profiles of fraud perpetrators: * The majority of frauds (64%) are committed by employees. But frauds committed by managers or executives are three-and-a-half times more costly than frauds committed by employees, because the higher employees rise in an organization, the more they are entrusted with company assets. * Males accounted for losses that were three times greater than those of females--although the frequency of incidents was roughly the same. …