Global Fraud Report: 5 Takeaways for Borrowers and Bankers

by: Smith and Howard

August 8, 2016

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The Association of Certified Fraud Examiners (ACFE) recently published its 2016 global fraud report. Over the last 20 years, the Report to the Nations on Occupational Fraud and Abuse has taught valuable lessons about the costs, schemes and methods used to detect white collar crime by analyzing real-world fraud cases.

Fraud continues to be a hot button for bankers who become indirect victims when borrowers that suffer fraud losses are unable to repay their debts. Here are five takeaways from the latest study for borrowers and bankers alike.

Lesson 1: Types of fraud

The ACFE classifies fraud into three groups: misappropriated assets, corruption and financial statement fraud.Asset misappropriation schemes were the most common but caused the lowest median loss ($125,000). These occurred in more than 83% of the cases in the latest fraud study, which covered fraud schemes investigated from January 2014 to October 2015.

Conversely, financial statement frauds were the least common type, accounting for less than 10% of the cases in the 2016 study. But they caused the highest median loss ($975,000). Corruption — including conflicts of interest, bribery, illegal gratuities and economic extortion — fell in the middle of this range with a median loss of $200,000.

Lesson 2: Costs of fraud

The typical organization loses 5% of its revenues to fraud. The median loss was $150,000 globally. U.S. for-profit businesses reported a median loss of about $180,000, regardless of whether they’re public or private.

In addition to these direct losses, fraud victims may suffer indirectly from lower employee morale and impaired productivity. When fraud strikes, it’s rare for a borrower to recoup monetary losses from the perpetrator. In the latest study, 58% of victim organizations hadn’t recovered a dime from fraud perpetrators.

Lesson 3: Profile of a perpetrator

The higher the fraudster’s level on the company’s organizational chart, the higher the losses he or she is likely to cause, according to the study. In the United States, the median loss from frontline employees was only $54,000. Conversely, owners and top executives caused a median loss of $500,000.

The ACFE study also found a correlation between tenure and fraud losses. People who worked for the victim organizations for one to five years caused a median loss of $100,000, compared to $250,000 for people employed by the victim organizations for more than 10 years.

Lesson 4: Methods of concealment

The reasons fraud is more costly when it’s committed by high-level employees relate to trust and power. These individuals have access to accounting systems and valuable assets, and they often have the ability to override internal controls.

A section that’s new in the 2016 ACFE report is how fraudsters hide dishonest behaviors. Regardless of the type of fraud, perpetrators tend to resort to these concealment methods: 1) creating, altering, and destroying physical documents, 2) creating and altering transactions in the accounting system, and 3) creating and altering electronic documents. Less than 6% of criminals didn’t take any steps to hide their frauds.

Lesson 5: Red flags

Because perpetrators usually go to great lengths to hide the fraud trail, it’s important to watch for people who:

  • Live beyond their means,
  • Suffer financial difficulties,
  • Associate unusually closely with a vendor or customer,
  • Possess a general “wheeler-dealer” attitude involving shrewd or unscrupulous behavior,
  • Are excessively controlling or unwilling to share duties, and
  • Are recently divorced or have other family problems.

Nearly 80% of the perpetrators in the ACFE study displayed at least one of these behavioral red flags during their schemes. If a borrower exhibits any of these signs, especially if the company’s loan payments or financial statements are late, you may want to investigate further. 

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