Corporate Investigations
December 8, 2022Challenges imposed by corruption and the occurrence of fraud in the companies
Recent research developed by various sources indicates that corruption and occupational fraud keeps growing rapidly and exponentially, despite several global initiatives to combat and punish the existing schemes, which continue to be refined and sophisticated in an infinitely faster way than the efforts of prevention and detection.
The most recent report released by the Association of Certified Fraud Examiners (“ACFE”) presented alarming data: an average loss of around US$1,783,000 per case, and a median of US$117,000, based on 2.110 cases in 133 countries. 21% of fraud cases reported $1 million or more losses.
Besides, according to the most recent KPMG Fraud Outlook report, it is estimated that 1.5% of the profits of large companies are lost due to fraud and non-compliance.
Fraud and corruption are global issues:
Asset misappropriation schemes are still leading the most common cases. 86% of reported fraud schemes involving it, with median losses of US$100,000. However, with only 9% of the reported cases in the ACFE study, financial statement fraud schemes implicate losses of around US$593,000 (median).
Corruption represents 50% of the reported cases, with median losses of US$150,000.
Management override is still a big challenge to combat fraud.
C-level perpetrators cause the most significant losses due to fraud schemes: around US$337,000 per case. Managers have also caused expressive losses of around US$125,000, while regular employees have caused losses of around US$50,000.
Occupational fraud has come mainly from the following departments: operations (15%), accounting (12%), executive/upper management level (11%), and sales (11%).
According to ACFE research, 85% of fraudsters displayed behavioral red flags of fraud, and they also observed an unbelievable rate of 6% of recidivist convicted perpetrators.
ACFE’s Fraud Tree
According to ACFE research, “fraudsters do not necessarily limit themselves to one method of stealing”:
Although some studies indicate a drop in the volumes of cash diverted in fraudulent schemes and corruption, the fraud tree shows us how naturally complex this is.
Note that the “tree” itself is already a simplistic picture. And schemes continue to undergo sophistication that makes tracking and even identification difficult. As a result, losses could be higher than the amounts reported in this research.
Another point of attention in this research is related to the duration of the disrupted schemes:
In practice, we may live with infinite schemes that have not yet been revealed.
If the reported losses are frightening, imagine a massive pipeline of schemes to be discovered, or worse, in corruption cases, completely unpunished and not quantified.
Fraud Detection & Victims
ACFE report also provides information regarding how occupational fraud was initially detected and who reported it:
There is not much use in presenting the breakdown of victims of fraudulent schemes. The summary is simple and symbolic: all types of organizations suffer losses from fraud and corruption, regardless of their size and line of business.
The losses measured are correlated with the line of business and their sizes:
And my perception, based on decades of experience with Public Companies and the government, is that the volume of losses calculated could be understated in this research.
ACFE research provided an infographic with losses by primary industries:
Make sure there are diversion schemes, fraud, or even corruption in some way in your companies. Not a single organization can be immune to all of this.
Have you become concerned about the losses you may be suffering in your organization?
There are several ways I can help you fight fraud and corruption, at different levels, with solutions and consulting tailored to your needs.
More than 27 years of professional experience are dedicated to corporate investigation, examining frauds and non-compliance, and investigating and combating corruption.
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