Study Shows Mining Ranks High in Fraud Loss-per-Case, Low in Frequency

Every two years since 1996, the Association of Certified Fraud Examiners (ACFE) has published a report analyzing the scale and nature of industrial fraud. ACFE’s most recent release, Report to the Nations 2020, shows that the mining industry had the biggest overall increase in fraud cases, climbing 30% over the last four years (from 20 cases to 26). However, the volume of mining fraud cases was eclipsed by those in banking and finance (386), government and public administration (195), manufacturing (185) and health care (149). While mining also registered the largest median loss ($475,000) of all industries examined in the report, its median financial loss decreased by 5% in the last four years.

The study contains an analysis of 2,504 cases of occupational fraud that were investigated between January 2018 and September 2019. This, said Austin, Texas-based ACFE, is a tiny fraction of the number of frauds committed each year against millions of businesses, government organizations, and nonprofits throughout the world. The data was gathered from its 2019 Global Fraud Survey. Each Certified Fraud Examiner (CFE) who took part in the survey was presented with a detailed questionnaire consisting of 77 questions about a specific case of fraud they had investigated. These CFEs provided information on the method of fraud employed, the loss, the victim organization, the perpetrator, the means of detection, and the response by the victim organization after the fraud had been detected.

According to the ACFE, the report shows that, in general, the schemes used by occupational fraudsters have stayed remarkably consistent over the years. At the highest level, there are three primary categories of occupational fraud. Asset misappropriation, which involves an employee stealing or misusing the employing organization’s resources, occurs in the vast majority of fraud schemes (86%); however, these schemes also tend to cause the lowest median loss at $100,000 per case. In contrast, financial statement fraud schemes, in which the perpetrator intentionally causes a material misstatement or omission in the organization’s financial statements, are the least common (10%) but costliest category of occupational fraud. The third category, corruption — which includes bribery, conflicts of interest and extortion — falls in the middle in terms of both frequency and financial damage. These schemes occur in 43% of cases and cause a median loss of $200,000.

The study said that in one-third of the cases in the study, a perpetrator committed more than one of the three primary categories of occupational fraud. More than 25% of fraudsters undertook both asset misappropriation and corruption schemes, while 3% misappropriated assets and committed financial statement fraud, 1% engaged in both corruption and financial statement fraud, and 5% participated in all three categories. 

It also noted that companies tend to catch noncash schemes the quickest (13 months), while several scheme categories typically last two years before being uncovered. Interestingly, despite the increasingly sophisticated fraud detection techniques available to organizations, tips were the most common way occupational frauds were discovered in ACFE’s study by a wide margin, as they have been in every one of its previous reports: More than 40% of cases in the study were uncovered by tips, which is almost three times as many cases as the next most common detection method.

With regard to the frequency of different types of fraud schemes according to business size, billing schemes occurred at almost twice the rate in small businesses (<100 employees) compared with larger organizations, while check and payment tampering was nearly four times more common at small companies. In contrast, corruption and noncash schemes occurred more frequently in larger organizations.

The ACFE said it asked survey respondents which of 18 common anti-fraud controls the victim organization had in place at the time of the fraud. Results show that independent external audits of the organization’s financial statements are the most common of the controls examined in the study; 83% of the victim organizations had their financial statements audited by an outside auditor. ACFE noted that while it classifies such audits as an anti-fraud control for purposes of the study, this mechanism is not primarily designed to detect or prevent all frauds. In fact, only 4% of the frauds in the study were uncovered through an external audit.

Other common anti-fraud controls include a code of conduct (present in 81% of victim organizations), an internal audit department (74%), and management’s certification of the financial statements (73%).

The organization warned that not all anti-fraud controls are created equally. To help organizations understand the potential impact of various controls, it compared the median losses and median durations of the frauds in the study based on whether each specific control was present at the victim organization during the fraud’s occurrence.

For every control it examined, organizations that had the control in place experienced smaller fraud losses and detected frauds more quickly than organizations lacking that control. Four anti-fraud controls in particular were associated with a 50% or greater reduction in both fraud losses and duration: a code of conduct; an internal audit department; management’s certification of financial statements; and regular management review of internal controls, processes, accounts or transactions. Internal audits and management reviews are both mechanisms that can be used to actively look for fraud, so their correlation with reduced fraud losses and duration stands to reason. In contrast, codes of conduct and management certifications of financial statements are less directly tied to fraud detection, but both mechanisms likely help increase the perception of detection and form the foundation for a holistic anti-fraud culture.

The study indicated that the most common anti-fraud control — external audits of financial statements — was only in place at 56% of small businesses, and only 48% of these companies had a code of conduct, compared with 92% and 91%, respectively, of organizations with more than 100 employees.

The ACFE said its past studies have shown that most occupational fraudsters have no prior criminal history before they commit their crimes, and current data reinforces those findings. Only 4% of the perpetrators in this study had been previously convicted of a fraud-related offense. Also, 41% of the occupational frauds in the study were never reported to law enforcement, which the ACFE said is also consistent with its past research. This indicated that the true number of repeat offenders is probably higher than what can be determined through criminal records.

The organization also noted that least one behavioral red flag was present in 85% of the cases in the study, and multiple red flags were present in 49% of cases. The seven most common red flags were: (1) living beyond means; (2) financial difficulties; (3) unusually close association with a vendor or customer; (4) excessive control issues or unwillingness to share duties; (5) unusual irritability, suspiciousness, or defensiveness; (6) a general “wheeler-dealer” attitude involving shrewd or unscrupulous behavior; and (7) recent divorce or family problems. At least one of these seven red flags had been identified before the perpetrator was caught in 76% of all cases.

The ACFE’s membership includes accountants, internal auditors, fraud investigators, law enforcement officers, lawyers, business leaders, risk/compliance professionals and educators. The report can be viewed and downloaded at acfe.com.