Ken Dulieu gives an important overview of the types of occupational fraud and how to spot them
One of the basic factors that all anti-fraud policies need to consider, is the types of fraud they are likely to face. A great source that details this information is the annual Report to the Nations, as compiled by the Association of Certified Fraud Examiners (ACFE).
The report is a comprehensive study of occupational fraud and is compiled using data gathered from anti-fraud professionals. The 2022 report sampled over 2,000 cases from 133 countries and covers every aspect of workplace fraud.
One of the metrics it examines in great detail is the categories of fraud that organisations face. This article looks at the findings and discusses what lessons can be learned by the hospitality and professional services sectors.
Categories of Occupational Fraud
The report begins by breaking down the categories of occupational fraud into three primary areas. These are the main branches in something they classify as the ‘fraud tree’. In other words, all occupational fraud will belong to one of the following categories:
· Asset Misappropriation (theft).
· Financial Statement Fraud.
The branch of the tree that a given fraud falls within has a large impact on the scale of the fraud. For asset misappropriation, the median loss was £86,000; for corruption, the median loss was £129,000; while for financial statement fraud, the median loss was a staggering £510,000.
There are instances where fraud will fall into more than one category. There is also a wide discrepancy in losses between the different categories. This emphasises the need for organisations to employ a wide range of anti-fraud procedures. These need to be robust enough to ensure that due diligence is applied at every level of an organisation.
The Fraud Tree
The three categories above make up the main branches of the ‘fraud tree’. Each category contains sub-categories and many of these contain their own sub-categories. The full breakdown of how the tree is constructed can be found on page 10 of the ACFE Report, but an abbreviated version of the classification system is detailed below.
For the sake of brevity, the full list of sub-categories is not listed, however, the above tables represent the majority of fraud types that organisations need to guard against.
As was mentioned briefly, many fraud schemes involve more than one of the three primary categories. This is another useful metric to cover, as it further helps when deciding how to focus anti-fraud methods.
The report's findings show that whilst theft alone was the most common type of fraud, theft and corruption wasn’t too far behind. The full findings are listed below: -
· Asset Misappropriation – 47 per cent.
· Asset Misappropriation and Corruption – 32 per cent.
· Corruption – 12 per cent.
· Corruption, Asset Misappropriation and Financial Statement Fraud – 5 per cent.
· Asset Misappropriation and Financial Statement Fraud – 2 per cent.
· Financial Statement Fraud – 1 per cent.
· Corruption and Financial Statement Fraud – 1 per cent.
Examining Asset Misappropriation
By far, the most common type of fraud is asset misappropriation. Because of this, the report takes an in-depth look at the category to help understand the potential organisational weak points that fraudsters can manipulate.
The report breaks asset misappropriation down into nine distinct categories. Billing was the leading type, with 416 cases and a median loss of £86,000. Noncash followed, with 385 recorded cases and a median loss of £67,000. Expense reimbursements came after, with 232 cases and a median loss of £34,000. Cheque and payment tampering is next, with 208 cases and a median loss of £34,000.
After this was cash on hand, with 199 cases and £13,000. Skimming followed, with 198 cases and a median loss of £42,000. Also was 198 cases was payroll, which has a slightly smaller median loss at £39,000. Cash larceny came after, with 169 cases and £39,000 median loss. Finally, we have register disbursements, with 58 cases and a median loss of £8,600.
The duration of the fraud also varies depending on the category of asset misappropriation:
· 18 months: billing, cheque and payment tampering, expense reimbursements, payroll.
· 16 months: skimming.
· 14 months: cash larceny
· 12 months: register disbursements, cash on hand, noncash
The velocity of fraud
This is a useful metric for organisations to understand. The ACFE analysed the compiled data to determine how fast different fraud types take to cause harm.
The ‘velocity of fraud schemes’ is calculated as a monthly median loss. It is worked out by dividing the loss amount by the number of months the fraud scheme was active.
Again, financial statement fraud, corruption, noncash, cheque and payment tampering and billing tend to have the largest monthly median loss numbers, so it is important to be aware of these areas in particular, among the other fraud categories mentioned in this article.
As the ‘velocity of fraud’ metric showed, fraud at a higher level can quickly devastate a business. With a higher median loss than the average across all sectors, the professional services sector needs to focus more of its anti-fraud resources on detecting fraud that falls into the corruption and financial statement fraud categories.
These are less common threats than asset misappropriation, but they cause far higher losses. Additionally, they often incorporate asset misappropriation and in most cases, this will be more than just a little skimming.
Understanding the common types of fraud that organisations face allows them to identify blindspots and more effectively allocate anti-fraud resources. However, the data also illustrates the importance of a suite of anti-fraud procedures that are robust enough to identify fraudulent behaviour at all levels and to do so quickly.
The summary report looks at all aspects of workplace fraud and is of huge interest to the professional services sector. One key factor that emphasises this is the median losses that fraud costs the industry – losses to the professional sector are 20 per cent higher than the median loss across all sectors.
The report analyses many of the crucial metrics of occupational fraud including:
• Most common detection methods
• Common demographics of fraud perpetrators
• The success of fraud prevention measures
• Affected Departments
By summarising the relevant findings and the lessons that the professional services sector can draw from them, it is possible to minimise the risk of fraud and even identify ongoing workplace fraud.
Ken Dulieu is chairman and chief executive of Capcon Limited capcon.co.ukTags:
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