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The Harsh Realities of Fraud
Between January 2016 and October 2017, Amazon Web Services (AWS) conducted an in-depth analysis of exactly how occupational fraud schemes take place, including who enacts them and how costly they prove to be. The study examined 2,690 cases of fraud across 23 major industry categories and 125 countries. The recorded losses exceed $7 billion, not accounting for the plethora of instances that were either not reported or have never been discovered.
Asset Misappropriation, Corruption, and Financial Statements, Oh My!
The three primary categories of fraud schemes are asset misappropriation, corruption, and financial statements. Each of these categories harbors smaller sub-categories, and many fraud schemes involve more than one approach.
- Asset misappropriation schemes were the most common, occurring in 9 out of 10 cases. However, they resulted in the lowest costs to the organization at a median of $114,000. Billing, check tampering, and non-cash asset theft all fall under asset misappropriation. They are among the most common fraudulent practices and can prove damaging if left unchecked.
- Corruption occurs almost 40% of the time and is the second most costly. These types of schemes become particularly harmful over a longer duration. The study showed that corrupt practices lasting at least 60 months are about 20 times costlier than schemes that are caught within the first six months. More often than not, perpetrators will attempt to cover their tracks by:
- Creating or altering fraudulent physical documents
- Creating or altering fraudulent transactions in the accounting system
- Manipulating journal entries
- Financial statement fraud constitutes the least least frequent occurrence (10%), but is the most damaging financially. The median loss nears $800,000.
Small Business = Big Losses
Findings indicate that small businesses (defined as having less than 100 employees) suffered nearly double the losses as larger companies. They demonstrated vulnerability in asset misappropriations, expense reimbursements, and financial statements. Bigger organizations, on the other hand, tend to find themselves victimized by long-running corruption schemes, often by management or executive-level positions.
Protecting Against Fraud
One of the most glaring issues facing organizations today is the enabling of fraudulent behavior. While inside tips and hot lines sniff out most fraudulent activity, these solutions often come after significant damage has already taken effect.
The study found a link between losses and fraud duration, which was impacted by the discovery method. The study cites that frauds detected by purposeful IT controls lasted an average of five months and caused a median loss of $39,000, while schemes that were passively detected (tip lines, law enforcement, etc.) lasted roughly two years and caused losses exceeding $1 million. Active, deliberate pursuit ended schemes more quickly, thereby reducing total losses.
Not every business can afford to implement full-scale protection, but even digitizing certain process that are based on rules and conducting regular audits will significantly reduce the likelihood of organizational fraudulence. Small businesses in particular must remain vigilant and leverage commercially available tools to protect themselves against these schemes.
Read the full report “Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse,” here.