Fraud
What is Fraud?
Black’s Law Dictionary defines fraud as follows:
“All multifarious means which human ingenuity can devise and which are resorted to by one individual to get advantage over another by false suggestions or suppression of truth, which included all surprise, trick, cunning or dissembling, and any unfair way in which another cheated.”
The key work in most definitions of fraud is deception. The Accountants Handbook of Fraud & Commercial Crime restricts this definition as follows: “criminal deception intended to financially benefit the deceiver”. This restricted definition more appropriately represents the activity that is going to be reviewed and discussed in the material. The Handbook goes on to describe that both qualifiers need to be present in the definition “criminal” and “financial benefit.”
The term criminal is not used in its strict legal sense but rather; it refers to any serious “wrong” action taken with malicious intent. Therefore, even if a perpetrator was able to avoid successful criminal prosecution due to lack of evidence or some legal technicality, for the purpose of our discussion, the activity will be considered criminal. In addition, there are many types of criminal deceptions that do not personally benefit the deceiver. For example if an individual was violating various environmental laws for the benefit of the company, it may be criminal in nature but did no personally benefit the perpetrator.
Unofficial estimates of internal theft and fraud range from good educated guesses to wild predictions. A 1996 survey conducted by the Association of Certified Fraud Examiners and Published as “Report to the Nation on Occupational Fraud and Abuse” accumulated actual cases of fraud and abuse from the experience of 2,608 Certified Fraud Examiners. The report disclosed the following:• Organizations lose 6 percent of annual revenue to fraud and abuse.• Fraud and abuse costs US organizations more than $400 billion annually.• The average organization loses more than $9 a day per employee to fraud and abuse. Recently, the Association released an update study “2002 Report to the Nation Occupational Fraud and Abuse”. The current study covers another 663 occupational fraud and abuse cases that caused over $7 billion in losses. The current study revises the above estimates as follows:• Organizations lose 6 percent of annual revenue to fraud and abuse.• Fraud and abuse costs US organizations more than $600 billion annually.• The average organization loses more than $4,500 per employee to fraud and abuse. The Report states that the cost of fraud and abuse is difficult to quantitatively measure because:• Not all fraud is uncovered;• Of that uncovered, not all is reported;• Incomplete information is gathered in some fraud cases;• That information which is gathered often is not distributed to management or the authorities; and• Civil or criminal action often is not taken against the perpetrator(s) of fraud. Most companies experience losses to fraud to some extent. In interpreting these costs, The Report suggests the following observations be considered:• Organizations are already paying for the economic losses from fraud and abuse as a part of their total operating costs• Because many employees see abuse as an informal employment benefit, some sociologists have even suggested chronic pilferage and certain other abuses might actually have a positive effect on morale and therefore increase productivity.• Much abuse is silently condoned in organizations. It is not restricted to rank and file; indeed, one study reflected that 62 percent of inventory shrinkage by employees was committed by company supervisors. The ACFE Report contained many characteristics of the typical fraud perpetrator. Characteristics were summarized by position in the organization, gender, age, martial status, and education. Some of the reports findings are as follows:
“All multifarious means which human ingenuity can devise and which are resorted to by one individual to get advantage over another by false suggestions or suppression of truth, which included all surprise, trick, cunning or dissembling, and any unfair way in which another cheated.”
The key work in most definitions of fraud is deception. The Accountants Handbook of Fraud & Commercial Crime restricts this definition as follows: “criminal deception intended to financially benefit the deceiver”. This restricted definition more appropriately represents the activity that is going to be reviewed and discussed in the material. The Handbook goes on to describe that both qualifiers need to be present in the definition “criminal” and “financial benefit.”
The term criminal is not used in its strict legal sense but rather; it refers to any serious “wrong” action taken with malicious intent. Therefore, even if a perpetrator was able to avoid successful criminal prosecution due to lack of evidence or some legal technicality, for the purpose of our discussion, the activity will be considered criminal. In addition, there are many types of criminal deceptions that do not personally benefit the deceiver. For example if an individual was violating various environmental laws for the benefit of the company, it may be criminal in nature but did no personally benefit the perpetrator.
Unofficial estimates of internal theft and fraud range from good educated guesses to wild predictions. A 1996 survey conducted by the Association of Certified Fraud Examiners and Published as “Report to the Nation on Occupational Fraud and Abuse” accumulated actual cases of fraud and abuse from the experience of 2,608 Certified Fraud Examiners. The report disclosed the following:• Organizations lose 6 percent of annual revenue to fraud and abuse.• Fraud and abuse costs US organizations more than $400 billion annually.• The average organization loses more than $9 a day per employee to fraud and abuse. Recently, the Association released an update study “2002 Report to the Nation Occupational Fraud and Abuse”. The current study covers another 663 occupational fraud and abuse cases that caused over $7 billion in losses. The current study revises the above estimates as follows:• Organizations lose 6 percent of annual revenue to fraud and abuse.• Fraud and abuse costs US organizations more than $600 billion annually.• The average organization loses more than $4,500 per employee to fraud and abuse. The Report states that the cost of fraud and abuse is difficult to quantitatively measure because:• Not all fraud is uncovered;• Of that uncovered, not all is reported;• Incomplete information is gathered in some fraud cases;• That information which is gathered often is not distributed to management or the authorities; and• Civil or criminal action often is not taken against the perpetrator(s) of fraud. Most companies experience losses to fraud to some extent. In interpreting these costs, The Report suggests the following observations be considered:• Organizations are already paying for the economic losses from fraud and abuse as a part of their total operating costs• Because many employees see abuse as an informal employment benefit, some sociologists have even suggested chronic pilferage and certain other abuses might actually have a positive effect on morale and therefore increase productivity.• Much abuse is silently condoned in organizations. It is not restricted to rank and file; indeed, one study reflected that 62 percent of inventory shrinkage by employees was committed by company supervisors. The ACFE Report contained many characteristics of the typical fraud perpetrator. Characteristics were summarized by position in the organization, gender, age, martial status, and education. Some of the reports findings are as follows:
Initial Detection of Frauds• Tip from Employee - 26.3%• By Accident - 18.8%• Internal Audit - 18.6%• Internal Controls - 15.4%• External Audit - 11.5%• Tip from Customer - 8.6%• Anonymous Tip - 6.2%• Tip from Vendor - 5.1%• Notification by Law Enforcement – 1.7%
Duration of Scheme Until Initial Detection• Less tan 1 month - 3.4%• 1-5 months - 18.9%• 6-11 months - 14.6%• 12-23 months - 21.1%• 24-35 months - 14.2%• 36-59 months - 14.2%• 60-120 months - 10.8%• Greater than 10 years - 2.7% Loss by Number of Perpetrators• One $67,000 (67.6%)• Two+ $450,000 (32.4%) Criminal History of Perpetrator• Never Charged or Convicted - 68.8%• Unknown - 21.3%• Prior Convictions - 6.9%• Charged but not Convicted - 2.9%
Considering the demographics defined above where does the typical CPA firm client fit in?Consider the perpetrator demographics.
Where does the typical entrepreneur or CFO/controller fit in?
What does the typical fraud perpetrator look like?
The Reports drew consistent conclusions as follows:• Certified Fraud Examiners consider the problem of occupational fraud and abuse to be a serious one.• There is a direct correlation between the employee’s age, sex and position and the median loss dueto fraud. The most costly frauds are committed by well-educated male executives.• Smaller organizations are the most vulnerable to occupational fraud and abuse.• Cash is the asset most frequently targeted by dishonest employees.• Most occupational frauds are ongoing lasting an average of 18 months.• A lack of understanding of the nature of occupational fraud and abuse adds to its cost.• Relatively few occupational fraud and abuse offenses are discovered through routine audits. The mostcommon detection method was through tips and complaints.• Internal controls are a deterrent to occupational fraud.• The rate of occupational fraud and abuse likely will rise.
Duration of Scheme Until Initial Detection• Less tan 1 month - 3.4%• 1-5 months - 18.9%• 6-11 months - 14.6%• 12-23 months - 21.1%• 24-35 months - 14.2%• 36-59 months - 14.2%• 60-120 months - 10.8%• Greater than 10 years - 2.7% Loss by Number of Perpetrators• One $67,000 (67.6%)• Two+ $450,000 (32.4%) Criminal History of Perpetrator• Never Charged or Convicted - 68.8%• Unknown - 21.3%• Prior Convictions - 6.9%• Charged but not Convicted - 2.9%
Considering the demographics defined above where does the typical CPA firm client fit in?Consider the perpetrator demographics.
Where does the typical entrepreneur or CFO/controller fit in?
What does the typical fraud perpetrator look like?
The Reports drew consistent conclusions as follows:• Certified Fraud Examiners consider the problem of occupational fraud and abuse to be a serious one.• There is a direct correlation between the employee’s age, sex and position and the median loss dueto fraud. The most costly frauds are committed by well-educated male executives.• Smaller organizations are the most vulnerable to occupational fraud and abuse.• Cash is the asset most frequently targeted by dishonest employees.• Most occupational frauds are ongoing lasting an average of 18 months.• A lack of understanding of the nature of occupational fraud and abuse adds to its cost.• Relatively few occupational fraud and abuse offenses are discovered through routine audits. The mostcommon detection method was through tips and complaints.• Internal controls are a deterrent to occupational fraud.• The rate of occupational fraud and abuse likely will rise.
There are other tax-cutting strategies in addition to those mentioned here. If you would like assistance in selecting tax-saving strategies that make the most sense in your situation, contact us today!