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(Solved) REPORT TO THE NATIONS O N O C C U PAT I O N A L F R A U D A N D A B U S E 2016 GLOBAL FRAUD STUDY Letter from the President In 1996, Dr. Joseph T....


Read the article “Drying Out Fraud.” For this case answer the following questions in a paper:

  • What kind of inventory misappropriation was discussed? Explain your answer.
  • What were the red flags?
  • How could this fraud have been prevented or detected earlier?
  • How was this fraud detected? Relate your answer to the Association of Certified Fraud Examiners’ Report to the Nations on Occupational Fraud and Abuse.
  • Relate the Fraud Triangle to this case.
  • Short papers should use double spacing, 12-point Times New Roman font, and one-inch margins. Sources should be cited according to APA 6th edition citation method. Page-length requirements: 1–2 pages.

Source documents are attached as PDF files.


REPORT TO THE NATIONS
O N O C C U PAT I O N A L F R A U D A N D A B U S E
2016 GLOBAL FRAUD STUDY Letter from
the President In 1996, Dr. Joseph T. Wells, CFE, CPA, founder and Chairman of the ACFE, directed the publication of the first Report
to the Nation on Occupational Fraud and Abuse. That study was a truly groundbreaking effort. Analyzing actual case information provided by Certified Fraud Examiners, the report presented statistical data on the cost of occupational fraud,
the perpetrators, the victims, and the various methods used to commit these crimes. This was the first study of its kind,
and the findings in the 1996 report serve as the foundation for much of what we now know about how occupational
fraud and abuse affects organizations.
It might be hard for some readers to understand or recall just how little we knew about occupational fraud twenty years
ago, but until the release of the first report, there was virtually no statistical information available on the cost, frequency,
methodology, or any other aspect of occupational fraud. Those who worked in the fraud examination field knew the
problem was huge, but no one could say precisely how large, and this made it very difficult to explain to organizations
and clients what a tremendous threat they faced.
If there is one great contribution the Report to the Nations has made to the anti-fraud community, it has been in helping
to raise the general level of awareness about fraud risk. We now live in a world where virtually all business and government organizations understand that fraud is a threat they must deal with. That was most certainly not the case in
1996. The challenge of preventing and detecting these crimes is still formidable, but recognizing the threat is the first
step, and we are honored to know that information contained in the past eight editions of the report has been used by
anti-fraud professionals throughout the world to educate their employers and clients.
On behalf of the ACFE, I am proud to present the 2016 edition of the Report to the Nations, our ninth and most extensive study to date. I believe the information contained in this report will be of great value to anti-fraud practitioners,
business leaders, government officials, academics, the media, and anyone else with an interest in understanding the
tremendous economic threat posed by occupational fraud.
James D. Ratley, CFE President
Association of Certified Fraud Examiners 2 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE Contents
Executive Summary.................................. 4 Perpetrators............................................. 48 Introduction............................................... 6 Perpetrator’s Position......................................................... 48
Position of Perpetrator Based on Region....................... 50 The Cost of Occupational Fraud............... 8
Projecting Total Fraud Losses Based on Imperfect Data ���� 8
The Fraud Costs We Know................................................... 8
Distribution of Losses.......................................................... 9 How Occupational Fraud Is Committed ����10
Overlap of Fraud Schemes................................................. 13
Asset Misappropriation Sub-Schemes.............................. 14
Scheme Types by Region................................................... 14 Corruption Cases by Region........................................ 16
Duration of Fraud Schemes............................................... 17
Concealment of Fraud Schemes........................................ 19 Detection of Fraud Schemes.................. 20 Perpetrator’s Tenure........................................................... 54
Perpetrator’s Department.................................................. 55
Schemes Based on Perpetrator’s Department.............. 56
Perpetrator’s Gender.......................................................... 57
Perpetrator’s Gender Based on Region......................... 57
Median Loss Based on Gender..................................... 58
Position of Perpetrator Based on Gender...................... 58
Perpetrator’s Age............................................................... 60
Perpetrator’s Education Level............................................ 61
The Impact of Collusion..................................................... 62
Collusion Based on Perpetrators’ Relationship to Victim ��� 63
Perpetrator’s Criminal and Employment History............... 66
Perpetrator’s Criminal Background................................ 66
Perpetrator’s Employment History................................ 67 Detection Method by Region............................................. 23 Behavioral Red Flags Displayed by Perpetrators............... 68
Behavioral Red Flags Based on Perpetrator’s Position �� 69
Behavioral Red Flags Based on Scheme Type.............. 70
Behavioral Red Flags Based on Perpetrator’s Gender ��� 71 Median Loss and Median Duration by Detection Method �� 25 Non-Fraud-Related Misconduct......................................... 72 Source of Tips.................................................................... 26 Human Resources-Related Red Flags............................... 73 Initial Detection of Occupational Frauds............................ 20
Initial Detection of Frauds in Small Organizations............. 22 Impact of Hotlines.............................................................. 27
Formal Reporting Mechanism Used by Whistleblower ���� 28 Case Results............................................ 74 Party to Whom Whistleblower Initially Reported .............. 29 Criminal Prosecutions........................................................ 74 Victim Organizations............................... 30
Type of Organization.......................................................... 30
Level of Government Organization................................ 31
Size of Organization........................................................... 32
Methods of Fraud in Small Businesses......................... 33
Industry of Organization..................................................... 34
Schemes by Industry..................................................... 36
Corruption Cases by Industry........................................ 37
Anti-Fraud Controls at the Victim Organization................. 38
Anti-Fraud Controls at Small Businesses....................... 39
Anti-Fraud Controls by Region....................................... 40
Effectiveness of Controls............................................... 43
Background Checks....................................................... 45
Internal Control Weaknesses That Contributed to Fraud �� 46 Civil Suits............................................................................ 76
Recovery of Losses............................................................ 77
Action Taken Against Perpetrator....................................... 78
Fines Against Victim Organization..................................... 78 Methodology........................................... 80
Analysis Methodology....................................................... 81
Who Provided the Data?.................................................... 81
Primary Occupation........................................................ 81
Nature of Fraud Examination Role................................. 82
Experience..................................................................... 82 Appendix................................................. 84
Index of Figures....................................... 86
Fraud Prevention Checklist..................... 88
Glossary of Terminology......................... 90
About the ACFE....................................... 91 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 3 Executive Summary
• The CFEs who participated in our survey estimated that
the typical organization loses 5% of revenues in a given
year as a result of fraud.
• The total loss caused by the cases in our study
exceeded $6.3 billion, with an average loss per case
of $2.7 million.
• The median loss for all cases in our study was
$150,000, with 23.2% of cases causing losses of
$1 million or more.
• Asset misappropriation was by far the most common
form of occupational fraud, occurring in more than
83% of cases, but causing the smallest median loss of
$125,000. Financial statement fraud was on the other
end of the spectrum, occurring in less than 10% of
cases but causing a median loss of $975,000. Corruption cases fell in the middle, with 35.4% of cases and a
median loss of $200,000.
• Among the various forms of asset misappropriation,
billing schemes and check tampering schemes posed
the greatest risk based on their relative frequency and
median loss.
• The longer a fraud lasted, the greater the financial
damage it caused. While the median duration of the
frauds in our study was 18 months, the losses rose as
the duration increased. At the extreme end, schemes
that lasted more than five years caused a median loss
of $850,000.
• In 94.5% of the cases in our study, the perpetrator took
some efforts to conceal the fraud. The most common
concealment methods were creating and altering
physical documents.
• The most common detection method in our study was
tips (39.1% of cases), but organizations that had reporting hotlines were much more likely to detect fraud
through tips than organizations without hotlines (47.3%
compared to 28.2%, respectively).
• When fraud was uncovered through active detection
methods, such as surveillance and monitoring or
account reconciliation, the median loss and median
duration of the schemes were lower than when the
schemes were detected through passive methods, such
as notification by police or by accidental discovery. 4 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE • In cases detected by tip at organizations with formal
fraud reporting mechanisms, telephone hotlines were
the most commonly used method (39.5%). However,
tips submitted via email (34.1%) and web-based or
online form (23.5%) combined to make reporting more
common through the Internet than by telephone.
• Whistleblowers were most likely to report fraud to their
direct supervisors (20.6% of cases) or company
executives (18%). 6.3
BILLION
$ IN TOTAL LOSSES 23%
of cases caused losses of $1 million or more $150,000
median loss per case • Approximately two-thirds of the cases reported to us
targeted privately held or publicly owned companies.
These for-profit organizations suffered the largest
median losses among the types of organizations
analyzed, at $180,000 and $178,000, respectively.
• Of the cases involving a government victim, those
that occurred at the federal level reported the highest
median loss ($194,000), compared to state or provincial
($100,000) and local entities ($80,000).
• The median loss suffered by small organizations (those
with fewer than 100 employees) was the same as that incurred by the largest organizations (those with more than
10,000 employees). However, this type of loss is likely to
have a much greater impact on smaller organizations.
• Organizations of different sizes tend to have different
fraud risks. Corruption was more prevalent in larger organizations, while check tampering, skimming, payroll,
and cash larceny schemes were twice as common in
small organizations as in larger organizations. • The banking and financial services, government and
public administration, and manufacturing industries
were the most represented sectors in the fraud cases
we examined.
• Although mining and wholesale trade had the fewest
cases of any industry in our study, those industries
reported the greatest median losses of $500,000 and
$450,000, respectively.
• As in previous studies, external audits of the financial
statements were the most commonly implemented
anti-fraud control; nearly 82% of the organizations in
our study underwent independent audits. Similarly,
81.1% of organizations had a code of conduct in place
at the time the fraud occurred.
• Small organizations had a significantly lower implementation rate of anti-fraud controls than large organizations. This gap in fraud prevention and detection coverage leaves small organizations extremely susceptible to
frauds that can cause significant damage to their
limited resources.
• While the implementation rates of anti-fraud controls
varied by geographical region, several controls—external audits of the financial statements, code of conduct,
and management certification of the financial statements—were consistently among the most commonly
implemented across organizations in all locations.
• The presence of anti-fraud controls was correlated
with both lower fraud losses and quicker detection. We
compared organizations that had specific anti-fraud
controls in place against organizations lacking those
controls and found that where controls were present,
fraud losses were 14.3%–54% lower and frauds were
detected 33.3%–50% more quickly.
• The most prominent organizational weakness that contributed to the frauds in our study was a lack of internal
controls, which was cited in 29.3% of cases, followed
by an override of existing internal controls, which
contributed to just over 20% of cases. • More occupational frauds originated in the accounting
department (16.6%) than in any other business unit. Of
the frauds we analyzed, more than three-fourths were
committed by individuals working in seven key departments: accounting, operations, sales, executive/upper
management, customer service, purchasing,
and finance.
• The more individuals involved in an occupational fraud
scheme, the higher losses tended to be. The median
loss caused by a single perpetrator was $85,000. When
two people conspired, the median loss was $150,000;
three conspirators caused $220,000 in losses; four
caused $294,000; and for schemes with five or more
perpetrators, the median loss was $633,000.
• Fraud perpetrators tended to display behavioral warning
signs when they were engaged in their crimes. The most
common red flags were living beyond means, financial
difficulties, unusually close association with a vendor
or customer, excessive control issues, a general
“wheeler-dealer” attitude involving unscrupulous
behavior, and recent divorce or family problems. At
least one of these red flags was exhibited during the
fraud in 78.9% of cases.
• Most occupational fraudsters are first-time offenders.
Only 5.2% of perpetrators in this study had previously
been convicted of a fraud-related offense, and only 8.3%
had previously been fired by an employer for fraudrelated conduct.
• In 40.7% of cases, the victim organizations decided not
to refer their fraud cases to law enforcement, with fear
of bad publicity being the most-cited reason.
• Of the cases in our study, 23.1% resulted in a civil suit,
and 80.8% of such completed suits led to either a
judgment for the victim or a settlement.
• In our study, 8.4% of the victim organizations were
fined as a result of the fraud. The proportion of victim
organizations fined was highest in the Western Europe
(15.6%), Southern Asia (13.6%), and Asia-Pacific
(11.7%) regions. • The perpetrator’s level of authority was strongly
correlated with the size of the fraud. The median loss
in a scheme committed by an owner/executive was
$703,000. This was more than four times higher than
the median loss caused by managers ($173,000) and
nearly 11 times higher than the loss caused by
employees ($65,000).
REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 5 Introduction Organizations face numerous risks to their success; several notable trends in how such fraud is committed, economic risk, disaster risk, supply-chain risk, regulatory how it is detected, and how organizations combat this risk, and technology risk all affect organizations in differ- threat. The stated goals of the 2016 report are the same ent ways and to varying degrees. While fraud risk is just as those of its predecessors: one of the many entries on this list, it is universally faced
by all business and government entities. Any organiza- • To summarize the opinions of experts on the per- tion with assets is in danger of those resources being centage of organizational revenue lost to fraud each targeted by dishonest individuals. And, unfortunately, year a notable portion of that threat comes from the very
people who have been hired to carry out the organization’s operations. It is this risk—the risk of occupational
fraud1—that the first Report to the Nation on Occupational Fraud and Abuse was published in 1996 to explore.
In the twenty years since the inaugural report was released, our continuing research on these topics has not
only come to represent the largest collection of occupational fraud cases ever analyzed, but has also illuminated • To categorize the ways in which occupational fraud
occurs
• To analyze the characteristics of the individuals who
commit occupational fraud
• To examine the characteristics of the organizations
that are victimized by occupational fraud
This report contains an analysis of 2,410 cases of occu-   Occupational fraud can be defined as “the use of one’s occupation for personal enrichment
through the deliberate misuse or misapplication of the employing organization’s resources or
assets.”
1 6 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE pational fraud that were investigated between January
2014 and October 2015. Figure 1 provides a summary Introduction
of where these cases occurred,2 as well as the relative losses incurred by the victims in different geographical regions.
Readers should note that the number of cases in each region largely reflects the demographics of ACFE membership,
as that is the source of our data. Thus, this figure should not be interpreted to mean that occupational fraud is necessarily more or less likely to occur in any particular region. Figure 1: Geographical Location of Victim Organizations
Region
United States
Sub-Saharan Africa Number of Cases Percent of Cases Median Loss
(in U.S. dollars) 1038 48.8% $120,000 285 13.4% $143,000 Asia-Pacific 221 10.4% $245,000 Latin America and the Caribbean 112 5.3% $174,000 Western Europe 110 5.2% $263,000 Eastern Europe and Western/Central Asia 98 4.6% $200,000 Southern Asia 98 4.6% $100,000 Canada 86 4.0% $154,000 Middle East and North Africa 79 3.7% $275,000 The findings presented in this report continue the ACFE’s mission of educating anti-fraud professionals, organizational
leaders, and the public at large about the threat of occupational fraud and how to effectively prevent and detect it. The
2016 report shows the continuation of numerous trends that we have identified during previous studies, provides information in several new areas, and highlights interesting ways that the occurrence of fraud has evolved over time and
varies across regions. We hope readers come away with a clear picture of how occupational fraud is perpetrated and
how it affects its victims, as well as the importance of proactive initiatives to combat this risk. 2   Geographical location was provided for 2,127 of the cases submitted; see the Appendix on page 84 for a detailed breakdown of these cases by country. THIS REPORT CONTAINS AN ANALYSIS OF 2,410 CASES
OF OCCUPATIONAL FRAUD THAT WERE INVESTIGATED
BETWEEN JANUARY 2014 AND OCTOBER 2015. THE
FRAUDS IN THIS STUDY TOOK PLACE IN 114 DIFFERENT
COUNTRIES THROUGHOUT THE WORLD. REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 7 The Cost of Occupational Fraud Anti-fraud professionals, business managers, govern- of revenues each year. As one way to illustrate the mag- ment and regulatory agencies, and the media each nitude of this estimate, applying this percentage to the have a vested interest in assessing the total amount of 2014 estimated Gross World Product of $74.16 trillion re- money lost to fraud each year. While many studies have sults in a projected potential total fraud loss of up to $3.7 attempted to determine the extent of fraud’s financial trillion worldwide.3 The limitation of this type of estimate impact, the challenges in arriving at the true total cost of

is that it is based solely on the opinions of our survey fraud are numerous. It is impossible to know exactly how participants and not on any specific data about actual much fraud goes undetected or unreported, and even fraud losses. However, the estimate comes from the calculations based solely on known fraud cases are likely collective knowledge of thousands of CFEs who together to be underestimated, as many victims downplay or mis- have tens of thousands of years’ experience in the calculate the amount of damage. Nonetheless, attempts
to determine the cost of fraud are important, because
understanding the size of the problem brings attention to
its impact, enables organizations to quantify their fraud
risk, and helps management make educated decisions
about investing in anti-fraud resources and programs. Projecting Total Fraud Losses Based
on Imperfect Data
To help measure the financial damage caused by fraud,
we asked the CFEs who participated in our study to
provide us with their best estimate, based on their
experience, of what percentage of revenues the typical
organization loses in a given year as a result of fraud. The
median estimate was that fraud costs organizations 5% 8 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE anti-fraud field. Given the impossibility of obtaining loss
data on all frauds, including those that are undetected or
unreported, this group likely has as much understanding about the harm fraud causes as any other resource
available.4 The Fraud Costs We Know
But the primary purpose of this study is not to make estimates; our goal is to collect and report actual case data.
In terms of hard numbers, the total loss caused by the
 https://www.cia.gov/library/publications/the-world-factbook/geos/xx.html (retrieved March
4, 2016) 3   This 5% estimate is further supported by Jim Gee and Mark Button’s report The Financial Cost
of Fraud 2015 (www.pkf.com/media/31640/PKF-The-financial-cost-of-fraud-2015.pdf), which
reviews numerous fraud cost calculations computed by various organizations and arrives at an
average fraud cost to organizations of 5.6%. 4 The Cost of Occupational Fraud
2,410 cases of occupational fraud in our study exceeded $6.3 billion.5 This is an enormous sum, especially considering
these cases represent just a tiny sliver of the thousands, or even millions, of frauds that likely took place throughout the
world during the period of our survey (January 2014 through October 2015). We cannot determine from this number
what global fraud losses truly are, but we can be confident those losses dwarf the known $6.3 billion, most likely by a
factor of hundreds or even thousands. In addition, this $6.3 billion total only reflects direct losses suffered by the victim
organizations; it does not include indirect costs, such as reputational harm or loss of stakeholder relationships, so the
true total loss represented by these cases is likely much higher. Distribution of Losses
Figure 2 shows the overall distribution of the dollar losses caused by the cases in our study; while approximately 54%
caused less than $200,000 in damage, more than 23% resulted in a loss of at least $1 million. Figure 2: Distribution of Dollar Losses
60%
55.5% 54.4% 53.6% PERCENT OF CASES 50%
40%
30%
20.6% 20%
12.8% 10% 23.2% 11.8% 11.5% 2016
5.7% 6.6% 6.1% 2014
3.5% 3.4% 3.5% 0%
Less than
$200,000 21.9% $200,000–
$399,999 $400,000–
$599,999 $600,000–
$799,999 2012 1.9% 1.8% 2.1% $800,000–
$999,999 $1,000,000
or More DOLLAR LOSS The overall average, or mean, loss caused by the frauds in this study was $2.7 million.6 However, throughout this report
we use median calculations, rather than the mean, when we report losses. Because the extremely large cases included
in our study tend to skew the mean losses disproportionately upward, we believe the median loss better represents a
typical fraud case. The median loss for all cases in our study was $150,000, with a quartile distribution as follows:
25th Percentile 50th Percentile 75th Percentile $30,000 $150,000 $800,000 Even viewing the losses reported to us through a conservative lens, a typical loss of $150,000 per fraud can be devastating to many organizations, especially when combined with the indirect fallout that often accompanies a fraud
scheme. Through this study, we hope to provide readers from all backgrounds—in the anti-fraud profession, in organizational management, in government and regulatory capacities, and in the media—an understanding of not only the
potential scale of fraud’s impact, but also the damage suffered by its organizational victims and their stakeholders.   The total losses represented in our study were actually significantly higher than $6.3 billion. However, our survey results included a few cases with losses so large that including them in the total loss
figure may...

 


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