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What could you buy with $3.5 trillion?

At the end of 2012, the Association of Fraud Examiners’ (ACFE) released the findings of a fraud and corruption survey from approximately 1400 respondents in 100 countries (appropriately captioned 2012 Report to the Nations) with the basic message being that fraud in the world today has reached seismic proportions.

Bruce Thornton

The foreword to the results of the survey records that the ACFE estimates that the annual loss to fraud and corruption in the world today sits at around $3.5 trillion. They are quick to qualify this by saying that this estimate was based on nothing more than the results of their survey which recorded that enterprises lose an estimated 5% of revenue to fraud per annum and that the estimated Gross World Product in 2011 was $70.28 trillion. It is clear that the ACFE has used poetic licence to highlight the magnitude of fraud, but even if it is a fraction of this amount, it is still an amount that should be taken seriously by all companies.

Companies should take heed of some of the most important findings from the survey, and take measures to counter fraud and corruption. The more surprising findings are detailed below.

Position of the perpetrator

In surveys performed across the world from the advent of fraud surveys (circa early 1990s), each survey has highlighted one common message: Your employees steal from you. In line with this now accepted fact, the ACFE drilled down into the position held by the employee.

In the cases canvassed in Africa (most of which were in South Africa), an executive was only responsible for 12% of the cases, but the average median loss caused in such instances was $750 000, whereas lower level employees were responsible for approximately 50% of the cases, but the average median loss was $50 000. Therefore, although lower level employees are the greatest source of fraud and theft, the most damaging frauds are perpetrated by executives of companies.

This trend is also evident in Europe (median loss caused by executives is $825 000, whereas median loss caused by lower level employees is $80 000), Latin America and the Caribbean (median loss caused by executives is $10m, whereas median loss caused by lower level employees is $165 000), and Oceana (median loss caused by executives is $2.3m, whereas median loss caused by lower level employees is $55 000).

Furthermore, the worldwide average period taken to detect the fraud committed by executives is much longer (24 months) than the average period taken to detect fraud committed by lower level employees (12 months).

Hence, one of the most important issues to cover in any anti-fraud strategies is the eradication of any senior management overrides of internal controls.

Profile of the perpetrator

Men are more likely to commit fraud than women. The survey recorded that, worldwide, 65% of the perpetrators were men and 35% were women. This trend is greatly exacerbated in Africa where 81% of the frauds were committed by men.

The age of the perpetrator most likely to steal from his company is between the ages of 36 to 45 years old, and is most likely to have been in the employ of his company for a period of one to eight years. The fraudster, in the majority of cases, had a university degree, and the perpetrators of fraud which had the greatest median losses had post-graduate university degrees. The fraudster is also most likely to be operating in the accounts department.

Companies most likely to be affected by fraud

The smallest organisations canvassed by the ACFE in the survey (companies of 100 employees or less) suffered the largest median losses and had the highest rate of instances of fraud. The reason for this is that smaller organisations do not have the financial resources available to implement anti–fraud controls similar to those controls implemented in larger organisations, and very rarely have a department or person dedicated to investigating fraud. With less attention to fraud risk management, smaller organisations are far more vulnerable to fraud.

Companies operating in the banking and financial services sector are the most vulnerable to fraud with 17% of all frauds occurring in this sector, with the public sector and manufacturing sector finishing a close second and third respectively. Although the banking and financial services sectors had the highest instances of fraud, the largest median losses occurred in the mining sector.

Internal controls

The 2012 Report to the Nations also (obviously) highlighted the effectiveness of internal controls. Perhaps the starkest finding is that external audit is not an effective fraud control mechanism (an external audit only identified 3% of the frauds). Hence, reliance on external auditors to identify fraud will be misplaced. Far more robust techniques are required to combat fraud, such as the implementation of a fraud hotline (44% of all frauds were identified via a tip off of some form). In Africa, 52% of the frauds were identified via tip offs. Organisations with some form of fraud hotline in place saw a much higher likelihood that fraud would be detected by a tip off (51%) than organisations without a hotline (35%).

Management review and internal audit also play a major role in detecting fraud. Both management review and internal audit detected 14% of the frauds covered in the survey.

The 2012 Report to the Nations highlighted the magnitude of fraud and corruption in the world today and has also provided some valuable insight. Perhaps the most thought-provoking finding for us is that the fraudsters wreaking most damage in companies are executives and have post-graduate university degrees. They do not call it white-collar fraud for nothing.

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