Profiling The Fraudster. Padgett Simon
showing several years of data, which highlight the consistency of findings over time. This uniformity is among the most notable of observations from the ongoing research and indicates that the findings truly reflect global trends in occupational fraud and abuse and that the ACFE statistics represent an important core base for profiling in any organization.
The Cost of Occupational Fraud and Corruption
Determining the full cost of occupational fraud is an important part of understanding the depth of and motivation for the fraud problem. News reports provide visibility to the largest cases, and most of us have heard stories of employees who have brazenly stolen from their employers. Even so, fraud is all too often treated as an anomaly in the business process rather than a common example of the risk faced by all organizations. Unfortunately, obtaining a comprehensive or exact measure of the financial impact of fraud and corruption on organizations is challenging, if not impossible. Because fraud inherently involves efforts of concealment, many fraud cases will never be detected, and of those that are, the full amount of losses might never be determined or reported. Consequently, any attempt to quantify the extent of all occupational fraud losses will be, at best, an estimate. As part of the ACFE's research in its Report to the Nations, each CFE who participated in the survey was asked to provide his or her best assessment of the percentage of annual revenues that the typical organization loses to fraud. The median response indicates that organizations lose an estimated 5 percent of their revenues to fraud each year. To illustrate the magnitude of this estimate, applying the percentage to the 2011 estimated gross world product of $70.28 trillion results in a projected global total fraud loss of more than $3.5 trillion. It is imperative to note that this estimate is based on the collective opinion of antifraud experts rather than on specific data or factual observations, and should thus not be interpreted as a literal calculation or extrapolation of the exact and total worldwide cost of fraud against organizations. Even with that caveat, however, the approximation provided by more than 1,00 °CFEs from all over the world with a median 11 years of experience as professionals who have a firsthand view of the fight against fraud may well be the most reliable measure of the cost of occupational fraud available and certainly emphasizes the undeniable and extensive threat posed by these crimes.
Of the 1,388 individual fraud cases reported in the ACFE survey, 1,379 included information about the total dollar amount lost to fraud, as shown in Figure 1.1.
Figure 1.1 Distribution of Dollar Losses.
Source: ACFE, Report to the Nations, 2012.
Individuals commit occupational fraud costing businesses considerable sums of money, worldwide a potential global fraud loss of more than $3.5 trillion, according to the ACFE report. The median loss, the report states, was $140,000. More than one-fifth of the frauds involved losses of at least $1 million and the frauds lasted a median of 18 months before being detected. It can be seen that any methodology that can be used to improve fraud risk management must be seriously considered.
Types of Occupational Fraud
The top three classifications or means of committing occupational fraud are corruption, asset misappropriation, and fraudulent financial statements, as depicted in Figure 1.2.
Figure 1.2 Classification of Occupational Fraud and Abuse.
Source: ACFE, Report to the Nations, 2012.
Within each classification is a myriad of types and schemes that need to be understood when considering methodology profiling. As indicated in Figure 1.3, asset misappropriation is by far the most frequent form of occupational fraud, comprising 87 percent of the cases reported; it was also the least costly form of fraud, with a median loss of $120,000.
Figure 1.3 Occupational Frauds by Category – Frequency.
Source: ACFE, Report to the Nations, 2012.
At the lower end of the frequency spectrum are cases involving financial statement fraud. Financial statement fraud was, however, by far the most costly form of occupational fraud. Financial statement fraud schemes made up just 8 percent of the cases in the ACFE study, but caused the greatest median loss, at $1 million. Corruption schemes fell in the middle, occurring in just over one-third of reported cases and causing a median loss of $250,000, with asset misappropriation having the lowest median loss, as depicted in Figure 1.4.
Figure 1.4 Occupational Fraud by Category – Median Loss.
Source: ACFE, Report to the Nations, 2012.
High-level or owner/executive perpetrators cause the greatest fraud loss to their organizations, in terms of monetary value rather than quantities of frauds. This is particularly shocking considering that the “tone at the top” is considered to be a fundamental constituent part of a sound antifraud program. In actual fact frauds committed by owners/executives were more than three times as costly as frauds committed by managers and more than nine times as costly as other employee fraud, according to the ACFE. Executive-level fraud also took much longer to detect.
The most common executive-level fraud, according to the survey, is corruption (54 percent of cases), followed by fraudulent invoicing schemes (33 percent), expense reimbursement fraud (21 percent), and fraudulent financial statements (21 percent). Other schemes include payroll fraud, check tampering, and cash theft.
Early Fraud
Business has been around for thousands of years, and the way it is run and sometimes abused can be embedded deep in the culture. Occupational fraud was defined by American criminologist Edwin H. Sutherland (1883–1950) as “a crime that involves a betrayal of trust implied in the holding of an office or other position of trust.” Sutherland used the term white-collar crime, casting doubt on the idea that poverty breeds crime. Sutherland argued in White Collar Crime that members of society occupying positions of privilege and status were just as likely to commit crime as those from lower classes. Sutherland's work, it could be argued, reflects some of the earliest studies on profiling criminals.
It can be contended that rationalization of occupational crime comes from its low visibility, occurring under cover of employment, with victims often suffering without meeting perpetrators, resulting in the indirect nature of the act giving the appearance that it is victimless. Research shows, however, that occupational fraudsters display criminal thinking that parallels street-level offenders with similar behavioral traits that serve as risk factors.
Generally, fraudsters live well-ordered lives and are well respected in their communities and at work. They commit fraud in their workplace to fulfill a financial need when there is an opportunity to do so and when then can rationalize their deed (Cressey's fraud triangle, 1953). Trusted, well-paid employees risk their careers by stealing from their employers due to financial difficulties, lifestyle maintenance, anger, low loyalty, revenge, and boredom (KPMG, 2011). Occupational fraud is costlier than other crimes and affects more people (ACFE, Report to the Nations, 2012). It relies on deceit and concealment and often employs sophisticated technology.
Further to motive and opportunity, techniques of neutralization enable individuals to violate normative and ethical standards (Coleman, 2002). For example, by justifying theft as “borrowing,” criminal activities may be deemed to be a normal way of stealing or achieving business targets. Trying to prove that a fraudster intends to permanently deprive an organization can be difficult when the fraudster has claimed that he intends to repay the amount or has already done so. Offenders may justify their behavior by claiming that they are not really hurting anyone, that everyone else is doing it, or that the activities