BATTLE CREEK, Mich. –
Defense Logistics Agency Disposition Service's Office of Internal Review assists management with fraud prevention and detection by conducting reviews and reporting suspected fraud to the DLA Office of Inspector General.
One way this is achieved is by keeping informed on the latest trends and information as it relates to fraud. Recently, the office reviewed the Association of Certified Fraud Examiners' recently published 2022 "Report to the Nations," a comprehensive study of 2,110 cases across 133 countries by Certified Fraud Examiners.
The study gathered data about occupational fraud cases that companies investigated around the world from January 2020 through September 2021, with a focus on the methods used to commit fraudulent acts, how illicit acts were detected, the characteristics of the fraud perpetrators, and the overall impact fraud had on the company.
The 2022 report estimates that the average organization loses 5% of its annual revenue to fraud each year, causing a median loss of $117,000 before detection. Occupational fraud committed by individuals against their employers is not an emerging concept, but the pandemic has created new opportunities for fraudsters. Organizations must understand how fraud is committed within their industry, develop effective tools for prompt detection, and have a plan to respond when occupational fraud has been detected.
Occupational fraud involves using one’s position to commit intentional wrongdoing against one’s employer. Occupational fraud can be categorized into one of three buckets:
- Asset Misappropriation – stealing or misusing company assets.
- Corruption – using one’s position of power for personal gain, including bribery, conflicts of interest, and extortion.
- Financial Statement Fraud – intentional material misstatement in financial statements. As outlined in Figure 2, asset misappropriation accounted for the largest cases studied. While the least common type of fraud, at only 9% of cases studied, it is the costliest, with an average loss of $593,000 per case.
How Is Fraud Committed and by Whom?
For a fraudulent act to occur, there are usually three factors present: Opportunity, Pressure, and Rationalization, also known as the Fraud Triangle. The opportunity to commit fraud typically results from internal control failures, such as the lack of segregation of duties that allow the perpetrator to commit and conceal the fraud at the same time. Pressures to commit fraudulent acts often stem from financial hardships. Lastly, rationalization allows a perpetrator to convince himself or herself that what they did was okay. For instance, the fraudster could rationalize that they deserve the other monies because they are overworked and underpaid. Organizations need to be aware that fraudulent acts can be conducted by employees of all levels, in all departments, but fraud schemes carried out by those charged with governance, including managers, executives and the Board of Directors tend to last the longest and cost the most. Executives only committed 23% of the cases studied, but the median loss of these cases was $337,000, significantly greater than losses caused by managers.
After committing a fraud scheme, the fraudster’s next task is to conceal their actions for as long as possible. This means that the fraudster must create ways for their acts to go undetected, as the normal course of business continues.
Those with the ability to create and edit financial records have an opportunity to commit and conceal fraudulent acts, which speaks to the importance of segregation of duties along with effective fraud detection methods.
Occupational fraud schemes last on average between 12-18 months prior to detection. How quickly a fraud scheme is detected has a significant impact on the overall impact of the scheme.
There are many types of detection tools, with the most common being tips (42% of cases), internal audits (16%), and management reviews (12%). Tips via hotlines continue to be an important anti-fraud mechanism and contribute to the quicker detection of fraudulent acts.
Perpetrators can cause their own downfall, as behavioral red flags are one of the most prominent indicators of fraud. Employees that are living beyond their means or buying lavish gifts for friends and family members without a known change in their finances should be cause for concern. Eighty-five percent of fraudsters displayed at least one behavioral red flag which included, but are not limited to:
- Living beyond ones means (39% of cases)
- Financial difficulties (25% of cases)
- Unusually close association with vendor/customer (20% of cases)
Impact of Fraud
ACFE estimates that organizations lose 5% of revenue to fraud every year, and total losses globally aggregate to over $3.6 billion. Try as they might, organizations cannot prevent all fraud; if an organization is operational long enough, eventually an employee will commit fraud. Consequently, the ability to quickly detect fraud is crucial. ACFE’s research shows that the median duration of fraud—that is, the typical time between when a fraud begins and when it is detected—is 12 months. The top concealment methods used by fraudsters studied included:
- Creation of fraudulent physical documents (39% of cases)
- Alteration of physical documents (33% of cases)
- Creation of fraudulent electronic documents (28% of cases)
Those with the ability to create and edit financial records have an opportunity to commit and conceal fraudulent acts, which speaks to the importance of segregation of duties along with effective fraud detection methods. Nearly half of the cases researched occurred due to lack of internal controls (29% of cases) and overriding existing internal controls (20% of cases). Other anti-fraud tools that have also been successful in detection and prevention of fraud cases include:
- Forensic analysis and investigation
- Internal corporate investigations
- Whistle-blower allegations
- Procurement fraud
- Money laundering
- Financial statement manipulation
- Any other type of occupational fraud
- Digital forensics and eDiscovery
- Estate and trust investigations
- Background investigations and lifestyle analyses
- Internal control assessments and gap identification/improvements
- Risk assessments
- Vendor due diligence and background investigations
- Employee due diligence and background investigations
- Proactive transaction testing in high-risk areas/geography
- Fraud awareness training
- Data analytics
In conclusion, preventing fraud is a team effort. If employees suspect fraud, the DLA OIG maintains a hotline to anonymously report tips: 800-411-9127.