Responses to fraud and recovering losses
By Ken Dulieu
Ken Dulieu explores some of the more common actions taken against perpetrators of occupational fraud
Understanding how organisations respond to fraudulent behaviour might seem like an empty exercise. However, it does provide an insight into how the aftermath of fraud. Additionally, it gives an overview of the repercussions for the business and the fraudster, including the chances of recovering the money lost to fraud.
In this article, we take a look at the findings of the most recent Association of Certified Fraud Examiners (ACFE) report to the nation. The report is one of the most comprehensive sources of real-world data relating to occupational fraud.
The annual report is compiled using data supplied by anti-fraud professionals. This year's report sampled over 2,000 cases from 133 countries. The report takes an in-depth look at all aspects of occupational fraud, including how organisations deal with the aftermath.
When examining the aftermath of fraud, the first metric that the report covers is the action taken against the perpetrators. The following data describes the most common internal actions taken, although as will be covered a little later, the stature of the perpetrator has a large bearing on the action taken.
Unsurprisingly, termination of employment came in at 61 per cent. Meanwhile, suspeinsion or probation occured in 12 per cent of cases, while perpetrators made up 11 per cent. 10 per cent agreed to a settlement, while 7 per cent faced no punishment.
However, the seniority and role of the perpetrator had a significant effect on the outcome. The report shows that the higher up a perpetrator is in an organisation, the greater the chance is of them receiving a lesser or even no punishment.
Many fraud cases are settled exclusively within an organisation. However, a large percentage will end up in civil or criminal courts. In this section, we discuss these and also touch on why many substantially sized frauds are not referred to law enforcement.
Of the fraud schemes covered by the report, 29 per cent of them resulted in civil litigation cases. The median loss in these cases was £260,000. By comparison, the median loss in cases that declined to file civil lawsuits was £61,000.
The outcome of cases that resulted in civil litigation is detailed below:
· 39 per cent of cases were settled.
· 29 per cent resulted in a judgement for the perpetrator.
· 27 per cent resulted in a judgement for the victim.
Over half (58 per cent) of all the sampled cases resulted in criminal proceedings. The median loss for these cases was £173,000. Cases that were not referred to law enforcement had a median loss of £43,000.
Of the cases referred, two-thirds of them resulted in successful convictions. The report's findings are as follows:
· 44 per cent pleaded guilty / no contest.
· 22 per cent were convicted at trial.
· 17 per cent resulted in a declined prosecution.
· 10 per cent were acquitted.
It is also worth noting that 26 per cent of fraud cases resulted in both a criminal referral and a civil lawsuit.
Finally, the ACFE report shows that the types of fraud least likely to be referred to law enforcement are billing/corruption, noncash, and expense reimbursement.
Why organisations decline to report cases to law enforcement
Half of all fraud cases were not reported to law enforcement because the victimised organisation felt that internal discipline was sufficient. However, many did not do so because of the potential for bad publicity. The full findings are below: -
· 50 per cent said that the internal action taken was sufficient.
· 30 per cent were worried about the adverse effects of the publicity surrounding the case.
· 28 per cent reached a private settlement with the perpetrator.
· 20 per cent felt that criminal proceedings would be too costly.
· 10 per cent cited a lack of evidence.
· 8 per cent other.
· 5 per cent relied on a civil suit only
· 1 per cent of the perpetrators disappeared.
This could be described as the crux of the matter. The losses attributed to fraud can be devastating to a business, and regardless of the fate of the perpetrator, for many businesses recovering the misappropriated funds is their primary concern.
Unfortunately, the report does not make pleasant reading when it comes to recovering fraud losses. Overall, 52 per cent of victim organisations did not recover any fraud losses.
Ultimately, for the vast majority, this is a fruitless or at least only partially successful exercise. This highlights the importance of fraud prevention and having a robust and effective series of anti-fraud controls in place.
The professional services sector is vulnerable to higher-end fraud. As detailed in the report the median loss for this sector is about 20 per cent higher than the loss across all sectors. As such, this means that the professional services sector has to make sure that due diligence is applied across the board to ensure they don’t have to worry about the aftermath of fraud.
Amongst the measures that businesses operating in the professional services sector should consider are:
· Strong external and internal auditing.
· Effective segregation of duties.
· External audit of internal controls over financial reporting.
The above information highlights one key reality: prevention is by far the best medicine. What the data shows is that uncovering fraud is just the start of a business's trouble. Legal and civil actions, the waste of valuable time, while the matter of the losses suffered all make occupational fraud a traumatic and worrying time.
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 is 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.uk