The Association of Certified Fraud Examiners (ACFE) has published its 2016 Report to the Nations on Occupational Fraud and Abuse. The latest biennial study breaks down white-collar crimes by industry, highlighting the common scams that manufacturers need to watch for and ways for them to minimize potential losses from fraud.
How much does fraud cost?
The ACFE estimates that the annual cost of fraud globally is roughly $3.7 trillion, based on a gross world product of $74.16 trillion in 2014. That’s a significant amount of money, but what hits closer to home is how much fraud affects individual victim organizations.
The median loss for fraud occurring at U.S. companies was $120,000, according to the 2016 report. Even more disheartening is the median loss for manufacturers of $194,000. A loss of this size would be difficult for most small manufacturers to absorb. Moreover, these estimates include only direct monetary losses. Fraud also potentially costs companies in terms of lost productivity, diminished employee morale and loss of confidence with customers.
Which schemes are most common?
The ACFE breaks down its findings by industry, and manufacturing ranks third in terms of the frequency of fraud cases. The most common schemes reported by manufacturers include:
Corruption. Almost half of manufacturers in the study (48.4%) fell victim to these scams. Corruption includes bribery, illegal gratuities and economic extortion.
Billing scams. About one-third of fraud cases (32.8%) involved billing ploys. These scams may include submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases.
Noncash theft. Rounding out the top three categories, noncash ploys were reported in more than 30% of fraud cases. These incidents often involve theft of such valuable assets as inventory and equipment.
In addition, roughly a quarter of fraud cases involved fictitious or exaggerated claims for expense reimbursement. Many fraudsters test the waters with these types of entry-level scams. Then they graduate to bolder schemes, if no one notices their expense fraud.
How can manufacturers fight fraud?
Fraud prevention and detection measures don’t necessarily have to be expensive to be effective. According to the ACFE, the anti-fraud controls that offer the highest potential return on investment — that is, offer the biggest reduction in comparative median fraud losses — include:
- Regular data monitoring and analysis techniques,
- Management review, and
- Reporting hotlines.
Across the board, the presence of anti-fraud controls was correlated with lower losses and quicker fraud detection. More specifically, victim organizations that were using proactive data monitoring and analysis techniques as part of their anti-fraud program suffered fraud losses that were 54% lower and detected the fraud in half the time compared to organizations that didn’t use these techniques. Management review and the presence of a hotline were correlated with 50% lower median losses and 50% less time to detect the scheme.
How should victims handle fraud allegations?
The majority of the fraud victims in the ACFE study haven’t yet recovered a dime from the perpetrators. Many worry that prosecuting criminals could lead to bad publicity. Others prefer to just fire the wrongdoers and then focus on recovery, rather than spend time and resources pursuing a financial settlement or conviction.
Prosecuting fraud may be worthwhile for several reasons, however. It sends a message 100c to would-be thieves that management has adopted a zero-tolerance policy, thereby deterring future crimes. In addition, a conviction will be reported on the fraudster’s permanent record, which may prevent him or her from striking other victims in the future. If you suspect fraud, contact your attorney or a forensic accountant for help deciding how to proceed.