Fraud on the Rise: New ACFE Report

Unmasking the Cost of Fraud

The ACFE’s biennial report underscores the significant financial toll of occupational fraud. The study estimates that organizations lose an average of 5% of their annual revenue to fraud, a conservative figure that doesn’t account for indirect losses like damaged reputation and lost productivity.

Fraud schemes are becoming increasingly sophisticated, with a median loss of $145,000 per incident. While larger organizations tend to suffer greater absolute losses, smaller businesses often face a more substantial impact as a percentage of revenue.

Understanding the Fraudster

The typical fraudster profile is evolving. While employees remain the primary culprits, the report highlights a concerning trend of higher-level executives perpetrating larger-scale schemes. These individuals often exhibit red flags like lavish spending or financial difficulties, making employee vigilance crucial.

Cryptocurrency has emerged as a tool for fraudsters, used to launder stolen funds and facilitate illicit transactions. This underscores the importance of staying updated on emerging fraud tactics.

Industries

Some industries are more susceptible to fraud than others. According to recent data, the sectors experiencing the highest incidence of fraud are:

• Banking and financial services (305 cases),
• Manufacturing (175 cases),
• Government and public administration (171 cases), and
• Health care (117 cases).

Another indicator of industry fraud risk is the financial impact of each incident. Industries experiencing the highest median losses per fraud case include mining ($550,000), wholesale trade ($361,000), manufacturing ($267,000), and construction ($250,000).

Types of schemes

The study identifies three basic types of frauds:

1. Asset misappropriation. This category, accounting for 89% of 2024 cases, involves the theft of company assets like cash or inventory.
2. Corruption. Nearly half of the cases (48%) involved corruption, such as kickbacks, bribes and extortion.
3. Financial misstatement. Constituting just 5% of cases, these schemes occur when dishonest employees, often in executive, managerial, or financial roles, deliberately misrepresent a company’s financial position. Examples include reporting fictitious revenue or concealing liabilities.

Median losses varied significantly by fraud type, with asset misappropriation causing the least damage at $120,000 and financial misstatement resulting in the greatest losses at $766,000. It’s important to note that fraud schemes often overlapped; for example, 35% of the frauds investigated in 2024 involved both asset misappropriation and corruption, whereas only 1% were limited to financial misstatement.

Methods of Detection

The 2024 study reports that the top ways victim-organizations detect fraud schemes include:

• Tips (43%),
• Internal and external audit (17%), and
• Management review (13%).

Employees were the primary source of fraud tips, accounting for over half (52%) of all reports. Customers (21%) and vendors (11%) also contributed significantly, while anonymous tips made up 15% of the total.

Effective reporting mechanisms are crucial for encouraging whistleblowers. Web-based (40%) and email (37%) reporting channels have surpassed telephone hotlines (30%) in popularity. Notably, web-based reporting has emerged as the preferred method for the first time in the study’s history. This shift contrasts sharply with 2020, when the three channels were used almost equally.

Prevention is Key

The ACFE emphasizes the critical role of internal controls in deterring fraud. Implementing robust measures such as surprise audits, management reviews, and employee training can significantly reduce fraud losses. Encouraging a culture of reporting suspicious activity through anonymous hotlines is also essential.

By understanding the latest fraud trends and implementing effective prevention strategies, businesses can mitigate risks and protect their bottom line.

Uncovering the Rising Threat of Occupational Fraud

The ACFE’s latest fraud report serves as a stark reminder of the evolving landscape of white-collar crime. As fraud schemes become increasingly sophisticated, businesses must remain vigilant and proactive in their approach to prevention and detection.

By understanding the latest trends, identifying vulnerabilities, and implementing robust internal controls, organizations can significantly reduce their exposure to fraud. Brady Ware could be a valuable partner in this endeavor. With expertise in financial analysis, risk assessment, and fraud prevention, our CFEs can help businesses develop tailored strategies to protect their assets and reputation.

By working together, businesses and CFEs can create a formidable defense against occupational fraud.