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Management often does not consider fraud prevention until it is too late—when executives are compelled to do so to cooperate with law enforcement agencies, or when the cost of fraud loss outweighs the benefits of not having anti-fraud measures in place. However, being proactive when it comes to fraud prevention efforts makes good business sense. Not only does it thwart fraud, but it reduces costs associated with fraud loss, mitigates the impact of enforcement actions if they arise, and provides reasonable assurance to stakeholders.
What Is Fraud?
Fraud can encompass any crime for gain that uses deception as its principal technique. More specifically, fraud is defined by Black’s Law Dictionary as “a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.” Fraud is a general type of crime that often involves deceiving someone for monetary gain. Fraud includes any intentional or deliberate act to deprive another of property or money by guile, deception, or other unfair means.
What Is Occupational Fraud?
Occupational fraud is defined as the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the organization’s resources or assets. Simply stated, occupational fraud and abuse occurs when an employee, manager, or executive commits fraud against their employer. Occupational fraud and abuse is a general synonym for terms like employee fraud or embezzlement, although technically, the term occupational fraud and abuse is broader and better reflects the full range of employee misconduct through which organizations lose money.
Cost of Occupational Fraud
Most management teams have no idea how much they lose to occupational fraud and abuse. In Occupational Fraud 2024: A Report to the Nations, the Association of Certified Fraud Examiners (ACFE) compiled data from 1,921 investigated occupational cases from 138 countries and territories, providing a global view of occupational fraud. Some of the key findings include the following: • The median loss caused by the occupational fraud cases in the study was $145,000. • The frauds reported lasted a median of 12 months before being detected. • Asset misappropriation schemes were the most common form of fraud by a wide margin, representing 89% of cases and causing a median loss of $120,000.
• Financial statement fraud schemes made up 5% of the frauds studied but caused a median loss of $766,000.
• Corruption schemes fell in the middle, accounting for 48% of cases and causing a median loss of $200,000
Victims of Occupational Fraud
The victims of occupational fraud are organizations that are defrauded by employees. According to Occupational Fraud 2024: A Report to the Nations, 42% of victim organizations were privately owned businesses and 26% were publicly traded companies, meaning that more than two-thirds of the victims represented were for-profit enterprises. Small businesses (those with fewer than 100 employees) face significantly different challenges in preventing and detecting fraud than larger organizations. The median loss for fraud cases involving small organizations in the study was $141,000—a disproportionate amount when compared to the losses suffered by companies with larger workforces.
Why Is Fraud Prevention Important?
Fraud can be committed either internally by employees, managers, officers, or owners of the company or externally by customers, vendors, and other third parties. It is important for members of management to understand the effects that fraud can have on their organizations so they can take a proactive stance to implement measures to help prevent it. Prevention measures can potentially help an organization reduce fraud loss, reduce penalties and fines, and provide reasonable assurance to stakeholders that management is proactive about addressing fraud.
Reduces Fraud Loss
According to Occupational Fraud 2024: A Report to the Nations, fraud prevention measures likely save businesses much of their revenue. Survey participants estimated that the typical organization loses 5% of its annual revenue to fraud. Applied to the estimated 2022 gross world product, this figure translates to a potential total fraud loss of more than $5 trillion.
Reduces Penalties and Fines
Fraud prevention efforts often require an up-front cost that some business leaders want to avoid. However, compliance enforcement actions are on the rise, bringing with them hefty fines. The U.S. Securities and Exchange Commission (SEC) brought 760 enforcement actions and recovered $6.4 billion in penalties and disgorgements in the 2022 fiscal year, setting a record.
Reasonable Assurance to Stakeholders
The effect of a fraud can extend beyond the actual dollar amount lost. When fraud occurs, employees might lose confidence in the security of their jobs, leading to loss of productivity. In addition, the company’s image is tarnished, decreasing its reputation in the eyes of existing and potential customers, vendors, and investors. Fraud prevention efforts can help to reduce these impacts to an organization by providing both internal and external stakeholders with reasonable assurance that fraud is being addressed within the organization.
Prevention Versus Deterrence
There are two strategies that management can use to minimize fraud—prevention and deterrence. Although the terms are frequently used interchangeably, they are not the same thing.
Prevention, in the sense of fraud or other criminal acts, involves removing the root causes of the problem. To prevent fraud, one would have to eliminate the motivation to commit it, such as the common injustices that lead to personal pressures.
Deterrence is designed to penalize offenders to deter future violations. Deterrence systems try to control the immediate behavior of individuals, not the long-term behaviors targeted by compliance systems.
While the prevention of fraud is a challenge, it tends to be easier to prevent than average street crimes. Most violent crimes are committed impulsively, and criminologists agree that those crimes can be very difficult to prevent. Conversely, fraud offenders are deliberate people. At each stage of the offense, they carefully weigh—consciously or subconsciously—the individual risks and rewards of their behaviors. For this reason, their conduct can be more easily modified.
Source: ACFE
