"Participants in our survey estimated that U.S.
organizations lose 7% of their annual revenues
to fraud. Applied to the projected 2008 United
States Gross Domestic Product, this 7% figure
translates to approximately $994 billion in
fraud losses.
"Occupational fraud schemes tend to be
extremely costly. The median loss caused by the
occupational frauds in this study was $175,000.
More than one-quarter of the frauds involved
losses of at least $1 million.
"Occupational fraud schemes frequently
continue for years before they are detected.
The typical fraud in our study lasted two years
from the time it began until the time it was
caught by the victim organization.
"This Report focuses on 11 distinct categories of
occupational fraud. The most common fraud
schemes were corruption, which occurred
in 27% of all cases, and fraudulent billing
schemes, which occurred in 24%. Financial
statement fraud was the most costly category
with a median loss of $2 million among the 99
financial misstatements in this Report.
"Despite increased focus on anti-fraud controls
in the wake of Sarbanes-Oxley and mandated
consideration of fraud in financial statement
audits due to SAS 99, our data shows that
occupational frauds are much more likely to
be detected by a tip than by audits, controls
or any other means. Forty-six percent of the
cases in this Report were detected by tips from
employees, customers, vendors, and other
sources. Tips were also the most common means
of detection in 2002, 2004, and 2006.
"The
implementation of anti-fraud controls appears to have a measurable impact on an
organization ─
exposure to fraud. We examined
15 specific anti-fraud controls and measured
the median loss in fraud cases depending on
whether organizations did or did not have a
given control at the time of the fraud. In every
comparison, there were significantly lower losses
when the controls had been implemented. For
example, organizations that conducted
surprise audits suffered a median loss of
$70,000, while those that did not had a median
loss of $207,000. We found similar reductions
in fraud losses for organizations that had
anonymous fraud hotlines, offered employee
support programs, provided fraud training
for managers, and had internal audit or fraud
examination departments.
"The Report includes frauds that impacted
organizations in a number of different
industries. The industries most commonly
victimized by fraud in our study were banking
and financial services (15% of cases),
government (12%) and healthcare (8%).
Among industries with at least 50 cases,
the largest median losses occurred in
manufacturing ($441,000), banking
($250,000), and insurance ($216,000).
"Small businesses are especially vulnerable to
occupational fraud. The median loss suffered
by organizations with fewer than 100 employees
was $200,000. This was higher than the median
loss in any other category, including the largest
organizations. Small businesses also suffered the
largest losses in our 2006 study. Check
tampering and fraudulent billing were the
most common small business fraud schemes.
"Lack of adequate internal controls was most
commonly cited as the factor that allowed
fraud to occur. Thirty-five percent of
respondents cited inadequate internal controls
as a primary contributing factor in the frauds
they investigated. Lack of management review
and override of existing controls were each cited
by 17% of respondents.
"Seventy-eight percent of victim
organizations modified their anti-fraud
controls after discovering that they had been
defrauded. The most common change was to
conduct management review of internal
controls, which occurred in 56% of cases.
Implementation of surprise audits was the next
most common response, followed by fraud
training for managers and employees.
"Occupational frauds were most often
committed by the accounting department or
upper management. Twenty-nine percent of
frauds in this Report were committed by
persons in the accounting department, while
18% were committed by executives or upper
management. Frauds committed by executives
were particularly costly, resulting in a median
loss of $853,000.
"Occupational fraudsters are generally firsttime
offenders. Only 7% of fraud perpetrators
in this study had prior convictions and only
12% had been previously terminated by an
employer for fraud-related conduct. These
results are consistent with our 2004 and 2006
Reports.
"Fraud perpetrators often display behavioral traits
that serve as indicators of possible illegal
behavior. The most commonly cited
behavioral red flags were perpetrators living
beyond their apparent means (39% of cases)
or experiencing financial difficulties at the
time of the frauds (34%). In financial
statement fraud cases, which tend to be the
most costly, excessive organizational pressure to
perform was a particularly strong warning sign."
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Previous studies have observed that there are two general characteristics of emerging businesses that make them especially vulnerable to employee fraud:
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