A deeper understanding of occupational fraud

Fraud fighters recognize the ACFE’s Report to the Nations as the premier study of occupational fraud. ACFE CEO John Warren, J.D., CFE, takes readers on an in-depth tour of the 13th edition of this comprehensive report of occupational fraud, its perpetrators and victims, and its costs to help anti-fraud professionals better protect their organizations against this pernicious economic crime. 

In March, the Association of Certified Fraud Examiners (ACFE) released Occupational Fraud 2024: A Report to the Nations, the 13th edition of the report, first published in 1996. Today, anti-fraud professionals around the world recognize the report as the largest and most widely respected occupational fraud study in the world. We’re enormously proud of the impact the report has had on advancing the common body of knowledge about occupational fraud. We also take great pride in knowing the report has helped Certified Fraud Examiners (CFEs) throughout the world raise awareness about the threat occupational fraud poses to their businesses, clients, governments and communities.

I also have a special point of pride regarding the Report to the Nations. When I began my career at the ACFE in 1996, my first job was working with our founder and Chairman Dr. Joseph T. Wells, CFE, CPA, on the survey results that produced the data for the first edition of the report. I was a lead author for each edition of the report from 2002 through 2022, and in that time, we made massive gains in the quality of data compiled and disseminated to our members. This year is the first time since I began working at the ACFE that I’m not an author of the study. But I remain immensely proud of the work our Research team has done to produce the 2024 edition, which in my not-entirely-uninformed opinion, is the most complete and informative edition to date.

As you likely know, the Report to the Nations is available to the public free of charge at ACFE.com/RTTN, and I encourage all ACFE members to download the report, read it cover to cover, and share it with your clients, teams and management. The study contains a wealth of information valuable to anyone in the anti-fraud profession. Here, I’ll highlight some of the more interesting findings from this year’s report and explain how you can make use of the data.

Spoiler alert: Fraud costs a lot

When we see mentions of the Report to the Nations in the media or hear anti-fraud professionals reference its findings, those discussions are usually about the report’s data on the costs of fraud. For those of us in the anti-fraud profession, knowing the costs associated with occupational fraud helps us assess risk and make informed decisions about our anti-fraud programs. But the data concerning losses to fraud in the report is also critically important because it helps us raise awareness about fraud risk with our clients and within our companies. For as many gains as we’ve made in improving our understanding of fraud risk, educating clients and management about the true threats posed by fraud can still be a challenge. To do that, we need data, which is why the Report to the Nations findings are so critical.

In this year’s report, we once again find that CFEs estimate that a typical organization loses 5% of its revenue to fraud each year. A consistent finding for years, this number is based on the collective opinions of the CFEs we surveyed. In truth, we can’t know for certain how much a typical organization loses to fraud because many frauds go undetected, and many times, organizations don’t report the ones they do detect to law enforcement. Recently, the U.S. Government Accountability Office (GAO) issued its first-ever Fraud Risk Management report, which assesses levels of fraud in federal government spending programs. (See “2018-2022 Data Show Federal Government Loses an Estimated $233 Billion to $521 Billion Annually to Fraud, Based on Various Risk Environments,” April, 2024.) The GAO estimates losses between 3% and 7%, which places our 5% estimate in the center of its range. Other studies have found total fraud losses near or above our 5% estimate.

Assuming that our 5% estimate is correct, that would translate to roughly $5 trillion in global losses each year. To put that number in perspective, $5 trillion is more than the entire GDP of Japan — an astounding figure. (In 2023, Japan’s gross domestic product was $4.21 trillion.)

In truth, though, the 5% estimate is a bit beside the point. Whether the true, expected loss for a given organization is a little lower than our 5% estimate or a bit higher, we’re talking about trillions of dollars lost each year because of occupational fraud. This is money that could be spent on hiring employees, raising wages, developing new technologies, providing government benefits, building infrastructure or eradicating disease. Instead, the money is going into criminals’ pockets. The drain that occupational fraud exerts on the global economy is severe, and I’d argue, it’s likely the costliest form of economic crime in the world. Raising awareness of the problem is crucial.

For hard data, look at losses per case

While the 5% estimate makes headlines, the real meat in the report is losses per case. If you aren’t aware of our methodology, the Report to the Nations is based on data from actual cases investigated by CFEs around the world. We provide these CFEs with a detailed survey that asks, among other things, how much the victim organization lost because of the fraud reported. This gives us hard data on fraud losses per case and allows us to measure the impact of occupational fraud cases in several insightful ways.

The 2024 report is based on 1,921 cases of fraud that collectively cost victim organizations approximately $3.1 billion. The median loss among the cases in our study was $145,000. We use median loss figures throughout the report to approximate what a “typical” fraud looks like. For instance, based on our data we’d expect that a typical case of occupational fraud will cost an organization $145,000. That’s a much larger figure than the $117,000 median loss per case we found in our 2022 study. (See Occupational Fraud 2022: A Report to the Nations, ACFE.)

CFEs can use the loss-per-case data from the report in many other useful ways. For instance, Figure 2 below plots the losses in all 1,921 cases in our study, giving us a way to consider the upper-bound risks associated with occupational frauds, rather than just looking at the median or “typical” case.

We see in Figure 2 that while the median loss per case was $145,000, the 75th percentile loss was $750,000. In other words, 25% of the cases in our study cost the victim organization at least $750,000. You’ll also see in the Global Cost of Fraud infographic on page 9 of the report that 22% of all cases caused losses of $1 million or more. (See ACFE.com/RTTN.) Furthermore, the average loss per case was $1,662,000. Why is the average loss so much higher than the median? At the high end, the fraud cases in our study were enormous, often reaching or exceeding tens of millions of dollars.

CFEs must understand this distribution of losses and pay attention to the average and 75th percentile data, which help provide a complete picture of the risks for organizations that lack an effective anti-fraud program. When making the case to clients or management for more investment in anti-fraud programs, we do a disservice if we don’t educate them about their worst-case scenario and explain how large frauds frequently get on the right tail of the distribution. Although a “typical” $145,000 fraud case would certainly be detrimental to the victim organization, an “average” $1,662,000 fraud case is a significantly larger problem. Our clients and companies need to think about this heightened level of risk before they make decisions about their fraud prevention strategy.

Fortunately for readers, the ACFE’s Research team compiled this information in statistical analysis tables at the end of each section of the report with mean and quartile loss data for cases sorted across a number of different dimensions. Suppose you’re a CFE in the energy industry who’s giving a presentation to your audit committee on fraud risk. You could use the Figure 3 table below (page 51 of the report) to show that the mean loss among 75 energy industry cases in our study was $2,603,000. This is going to be far more impactful than pointing out that the median loss per case is $152,000, and it gives the committee a complete picture of its high-end fraud risk.

Surprise! Controls do help limit fraud losses

The report also uses case loss data to help us estimate the effectiveness of various anti-fraud controls in limiting fraud losses. We presented survey respondents with a list of 18 common anti-fraud controls, such as surprise audits, employee support programs and rewards for whistleblowers. We asked whether the victim organization in their case had each control in place at the time the fraud occurred. We then sorted all cases into two batches for each control: frauds in which the control had been in place and frauds in which the control had been missing. Finally, we calculated the median loss and duration of the frauds based on whether each control was present or missing. This helped us determine how the presence of anti-fraud controls relates to median loss, as shown in Figure 4 below (page 40 of the report).

For example, 71% of the victim organizations in our study had a fraud hotline or reporting system in place at the time their frauds occurred. Organizations with hotlines suffered median fraud losses of $100,000 per case, compared to a $200,000 median fraud loss for organizations that didn’t have hotlines. The presence of a hotline was associated with a reduction in fraud losses.

But what’s exciting about the data in this table can be found in the column on the far right. (See Figure 5 below.) Every anti-fraud control we tested was associated with lower fraud losses. And the same was true when we analyzed the duration of frauds. Every control we tested was also associated with faster fraud detection.

Given the limitations in our dataset, we can’t draw precise one-to-one correlations between each control and its specific impact on fraud loss. Most victim organizations had more than one of these controls in place when the frauds occurred, so it’s difficult to say in any one case whether any specific control was the primary reason for fraud detection or loss limitation. But the broad trend of the data over such a large sample size indicates that organizations that invested in any of these anti-fraud controls saw positive impacts in the form of lower fraud losses and faster detection. This data is also consistent with our findings in prior editions of the report.

This data can be pivotal in helping you measure the return on investment of anti-fraud controls. A common question: How can we measure money saved when our controls prevent a fraud from ever happening? Although the data doesn’t provide a complete answer to that question, it does demonstrate that an investment in anti-fraud controls can have a positive financial impact on organizations. Use this key data when making the case for investments in anti-fraud programs or resources.

Fraudsters’ behavior gives us clues if we know what to look for

Given the colossal cost of fraud, CFEs must use every tool at our disposal to help identify occupational fraud and limit its losses. In addition to identifying financial clues and anomalies, CFEs need to understand and recognize the behavioral characteristics of fraud perpetrators. We’ve been tracking this information in the Report to the Nations since 2008, and our data is strikingly consistent and highly informative.

In our survey, we presented respondents with a list of 20 behavioral indicators commonly identified as red flags of fraud. We asked which, if any, of those indicators the perpetrator displayed before discovering the fraud. The word “before” is key; we’re trying to determine whether the frauds might’ve been detected earlier based on behavioral indicators.

We found that in 84% of cases, at least one common behavioral red flag had been observed before the fraud was detected. In other words, in 84% of cases, the fraud might’ve been detected earlier if someone had connected the behavioral clue with the possibility of fraudulent conduct. The data sends a clear message: If we can do a better job of training our auditors, investigators, managers and general staff about behavioral red flags, we may be able to catch occupational fraud earlier and limit fraud losses.

CFEs reported eight distinct red flags in at least 10% of cases in our study. These “Big 8” red flags are the most commonly reported behavioral indicators of fraud, as shown in Figure 6 below (also found on page 68 of the report). Collectively, these eight key warning signs were observed in 75% of all cases. In other words, we’d expect to see at least one of these “Big 8” behavioral red flags in three out of every four occupational fraud cases.

The consistent occurrence of these red flags throughout the years is an interesting finding. Even though every version of our study contains an entirely distinct set of fraud cases committed by a distinct set of fraudsters, each one of these eight key warning signs has been reported in at least 10% of cases in every one of our studies. Year after year, these are the eight most common behavioral indicators of occupational fraud.

“Living beyond means” has been the most common red flag every time we conduct this analysis. In these cases, a person exhibits wealth or expenditures that can’t easily be explained given their known sources of income. If an accounting clerk who makes $45,000 a year shows up to work one day driving a $200,000 car, it’s entirely possible that there’s a reasonable explanation. Maybe the clerk inherited money or has a wealthy parent who bought it for them. Maybe they borrowed the car from a wealthy friend. But if company records show financial irregularities that could be related to accounts the clerk oversees, the red flag should trigger a heightened level of scrutiny. The identification of the behavioral clue, coupled with other fraud indicators, indicates an elevated likelihood of fraud.

Red-flag data can teach employees what fraud behavior looks like

We can also use the data on behavioral red flags to inform fraud awareness training for staff, managers and other non-fraud personnel at our organizations. As you may know, the Report to the Nations consistently finds that whistleblower tips are the most common method of catching fraud. In our 2024 study, 43% of occupational frauds were initially detected by a tip. As Figure 7 below (found on page 24 of the report) shows, frauds were at least three times more likely to be detected by a tip than by any other detection method. Since we began tracking fraud detection data in 2002, tips from a whistleblower remain the most common way fraud comes to light, regardless of how we break down the data. This is true whether we’re looking at public companies, government agencies or nonprofits (no matter the region). Simply put, the most efficient, effective way to detect an occupational fraud is through a tip.

We should do all we can to make sure everyone in our organizations receives sufficient fraud awareness training so they’re able to recognize the financial and behavioral warning signs of fraud.

The case of Dixon, Illinois, comptroller Rita Crundwell is a great example. She perpetrated one of the largest municipal frauds in history, stealing almost $54 million at a rate of approximately $2.5 million a year. Over the course of her years-long crime, she gutted the city’s coffers to the point that they lacked the money to repair streets and sewers. The city had to cut back on necessary police and fire department expenditures and stopped paying to have the cemetery lawn cut due to budget shortfalls. At the same time, Crundwell (whose salary was $80,000 a year) owned four properties in and around Dixon valued at more than $3 million, plus a vacation home in Florida and a ranch in Wisconsin. She bought or bred approximately 400 champion quarter horses, owned more than $300,000 in jewelry, and had more than $13 million in assets at the time her estate was seized.

Stepping back for a moment, the connection was incredibly obvious. The city was in the middle of a catastrophic budget crisis; at the same time, its comptroller — the person who handled all the city’s money with almost no oversight — was living a life of wealth and luxury on a salary of $80,000 a year. In hindsight it seems obvious that Crundwell was stealing money from the city, but this fraud went on for years with no one in Dixon making the connection, despite her well-known extravagant lifestyle. Why is this? (See “She Stole $54 Million From Her Town. Then Something Unexpected Happened,” by Kathy Gilsinan, POLITICO Magazine, May 12, 2023.)

I’d argue it’s because the people who worked for the Dixon city government had never been properly trained to understand the warning signs of fraud. They’d known Crundwell for years. They liked her and trusted her so much that they let her run the city’s finances with practically no controls. It probably would’ve seemed inconceivable to them that their friend and colleague could’ve been stealing from them.

What would’ve happened if they’d been taught the basic tenets of fraud awareness: the Fraud Triangle, the importance of controls and the behavioral red flags that tend to show up in fraud cases? It seems highly likely that with even basic training someone would’ve drawn the connection between the city’s finances and Crundwell’s unexplainable wealth. That might’ve saved the city millions of dollars.

Crundwell’s case is an extreme one, but the Report to the Nations includes data supporting the importance of anti-fraud training for all organizations. We found that tips are twice as likely to come from employees who’ve received fraud awareness training. Remember: Tips are the most effective way to catch fraud, and employee training leads to more tips. We also found that in organizations that don’t provide training, median fraud losses are two times higher than in organizations that offer fraud awareness training. Educating our general staff has a real impact in limiting fraud losses.

Final thoughts

The data shared above represents just a small slice of the information contained in the report that I found particularly meaningful, but I highly encourage you to read the report for more findings that will help improve your anti-fraud programs. This year’s ACFE Research team included an infographic in the report to help serve as a guide. You can easily find charts and data within the report that’ll help improve your fraud risk assessments, benchmark your anti-fraud programs, improve your prevention and detection efforts, understand who puts your organization at risk, and persuade management and clients to seriously consider fraud risk and the value of anti-fraud programs.

In many ways, the Report to the Nations symbolizes the best of what we can achieve as an association. This study is the result of thousands of CFEs from around the world sharing their knowledge and experience, combined with months of hard work from our staff to compile that information and present it in a way that advances our common body of knowledge. The report’s findings help our entire profession improve its ability to safeguard clients, organizations and communities. It depicts our members’ willingness to collaborate and share with their colleagues, as well as our staff’s tireless dedication to support those members. On behalf of the ACFE, I’d like to thank everyone who took part in helping us produce this incredibly valuable resource.

John Warren, J.D., CFE, is the chief executive officer of the ACFE. Contact him at JWarren@ACFE.com.