Major accounting frauds rare, but extremely costly

By Robert Goldfield
From BizJournals.com

The most pervasive forms of fraud are the least damaging, but that provides only limited comfort to businesses, nonprofits and government agencies that fall victim to it. Nearly 90 percent of occupational fraud involves misappropriation of assets, usually cash, according to the Association of Certified Fraud Examiners.

A recent study of 583 cases of fraud found that 87 percent involved theft or misuse of assets, and the median damage to the organization in those instances was $80,000. Examples of misappropriation include skimming cash "off the top" before the organization can record it, or stealing it after it is recorded, termed "larceny." The rarest form of occupational fraud, in contrast, is the most damaging: Fraudulent statements accounted for only 5 percent of the 583 cases, but the median expense to the victimized organization was $4.25 million. Fraudulent statements involve falsification of an organization's financial statements, and can include overstating revenues and understating liabilities. Occupying the middle ground was a third type of fraud—corruption.

Described as instances in which people wrongfully use their influence in a business transaction in order to procure some gain (such as kickbacks) for themselves or an ally, corruption occurred in 13 percent of the cases (some cases involved more than one type of fraud), causing damage on average of $530,000. The association, in a report released this year, disclosed some other noteworthy statistics: The average fraud scheme lasted 18 months before it was detected. The average scheme in a small business causes $127,500 in losses, compared with an average of only $97,000 in the largest companies.

Organizations with fraud hotlines cut their fraud losses by about 50 percent per scheme. The most common method for detecting occupational fraud is through tips from employees, customers, vendors and anonymous sources. The second most common method of discovery is by accident.

Frauds committed by employees cause median losses of $60,000, while frauds committed by managers or executives cause median losses of $250,000. When managers and employees conspire in a fraud scheme, the median loss rises to $500,000. Losses caused by perpetrators older than 60 are 27 times higher than losses caused by employees 25 and younger.

The typical occupational fraud perpetrator is a first-time offender. Only 7 percent of perpetrators in the association's latest study were known to have prior convictions for fraud-related offenses. An estimated 6 percent of revenue will be lost in 2002 as a result of occupational fraud. Applied to the U.S. Gross Domestic Product, this translates to losses of approximately $600 billion.

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