Report to the Nations

The biannual survey report that the ACFE has provided since 1996 on occupational fraud and abuse has gone global. The “s” at the end of the word nation on the title page of the “2010 Report to the Nations on Occupational Fraud and Abuse” reveals a lot about fraud. Although nations might possess certain characteristics and customs, it appears that fraud has no particular affinity in targeting one country over another despite our cultural differences.

The report organizes 106 countries into five regions: Africa (21), Asia (30), Central/South America and the Caribbean (21), Europe (28), and Oceania (4). Two countries, Canada and the United States, were listed separately.

As with any survey, the results are subject to interpretation, but the source of the data – a key component of methodology – provides credibility to the results. An online survey was distributed to 22,927 CFEs in October 2009 of which 1,939 were completed and 1,843 were deemed useable. The 8.5 percent response rate is quite high considering each respondent was asked to answer 87 questions and provide a detailed narrative of the single-largest fraud case worked from January 2008 to the date of the survey.

The results of the survey do provide some surprises, but one result shouldn’t startle anyone: Fraud is everywhere, and no region is immune to the human proclivity to commit occupational fraud and abuse.

No matter the region, the No. 1 source of fraud scheme detection was “tips.” The range was a high of 50 percent in Africa to a low of 38 percent in the United States. “Management review” was second on the list in all regions except for “internal audits” in Asia and Europe.  

Despite the renewed emphasis of professional skepticism for external auditors, the percentage of fraud detection during an external audit ranges from a high of 13 percent in Central/South America and the Caribbean to a low of 2 percent in Africa. Most regions including the United States and Canada, are in the 3 percent to 6 percent range.

One obvious point to investigate is the high fraud detection percentage during external audits in Central/South America and the low in Africa. In all regions except for Central/South America, detection of fraud by accident was considerably higher than in external auditing. It appears that auditors worldwide are having similar difficulties in detecting fraud. Perhaps auditors need additional education in fraud detection techniques or perhaps the reasons why one region achieves better results than another are because of cultural differences.

The median loss (in U.S. dollars) had some surprises as well. Europe had the highest median loss of $600,000, but the United States had the lowest median loss of $105,000. However, the United States had almost 57 percent of the fraud cases reported.

For most regions, the No. 1 fraud scheme is corruption. Asia, Europe, Africa, and Central/South America are more than or near 50 percent. However, the United States and Canada are in the low 20 percent range. These numbers are important for businesses that wish to expand to new markets. The survey results create the impression that certain regions are more corrupt than others. However, be cautious not to stamp an entire region as corrupt; some countries reported more cases of fraud than others, and the survey is a self-reporting data source.     Africa had 112 fraud cases, of which two nations – South Africa (47) and Nigeria (21) – comprised 61 percent of the total. Asia had 298 fraud cases, of which four nations – China (62), India (37), Indonesia (27), and the United Arab Emirates (27) – comprised 51 percent of the total.

Europe had 157 fraud cases, of which four nations – the United Kingdom (28), Germany (19), Russia (18), and the Netherlands (14) – comprised 50 percent of the total.

Transparency International (TI) provides another corruption index available to business people. TI’s 2009 Corruption Perceptions Index ranks 180 nations. According to the most recent published report, New Zealand, Denmark, Singapore, Sweden, and Switzerland are listed as the least corrupt and Somalia, Afghanistan, Myanmar, Sudan, and Iraq are the five most corrupt.

“The Report to the Nations” provides a unique view of 15 anti-fraud procedures adopted by regions. Africa leads in having six categories of anti-fraud controls in place when fraud occurred:

• A code of conduct in 80 percent of fraud cases reported
• An internal audit/fraud examination department in 85 percent of fraud cases reported
• A management certification of financial statements in 69 percent of fraud cases reported
• An independent audit committee in 63 percent of fraud cases reported
• An anti-fraud policy in 49 percent of fraud cases reported
• Rewards for whistle-blowers in 10 percent of fraud cases reported

So with all these controls, what would some of the recommendations be for this region? CFEs might suggest to their clients that other measures might reduce the incidences of fraud. For example, “employee support programs” (Canada was No. 1 with 57 percent) or “adoption of hotlines” (Central/South America and the Caribbean was No. 1 with 53 percent) might prove to be valuable anti-fraud controls that the African region should increase.

Whistle-blowers’ percentages for all regions were lower than they should be. But then again reports are that a person’s life after blowing the whistle isn’t all that pleasant.

One observation hasn’t changed. The owner/executive remains the least likely candidate for perpetrating a fraud in any region. However, when that owner/executive commits a fraud it’s a substantially higher dollar loss due to fraud than when either an employee or a member of management perpetrates a fraud. The highest median loss from an owner/executive fraud is in Europe – an average of $2 million.

It’s no surprise that most fraudsters were found in accounting departments – No. 1 out of 15 departments in an organization in all regions (except for Asia) and the United States and Canada. Perhaps that’s another reason why surprise audits should be a staple in fraud prevention. For Asia, the sales department ranked first in fraud occurrence ahead of operations and accounting.

When it comes to fraud, gender equity hasn’t reached most of the world’s regions. Within the United States and Canada, more than 40 percent who committed fraud were female. However, in Asia and Europe less than 20 percent who committed fraud were female. It might only be a matter of time before these statistics reach parity.

The leading red flags to watch out for in detecting fraud continue to be “financial difficulties” and “living beyond one’s means.” However, Asia, Europe, Africa, Central/South America and the Caribbean, and Oceania also have “an unusually close association with vendor” as a leading red flag.

Some of those regions recently have seen the effects of bribery cases. The report reveals that the United States has “a close association with vendors” as sixth on the red flag list. We might wonder if the U.S. Foreign Corrupt Practices Act of 1977 provides a strong impediment to bribery in the international arena. If so, then perhaps this statute could be a model for other nations to follow.

We can learn a lot from reviewing and analyzing this global fraud study prepared by the ACFE. We should be thankful to the respondents and those in the ACFE who prepared the report. Now use the findings to your fraud-fighting advantage.

Richard Hurley, Ph.D., J.D., CFE, CPA, is an associate professor in the University of Connecticut (Stamford) School of Business. 

Tim Harvey, CFE, is director of the ACFE’s UK Operations. 

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