Ken Dulieu examines businesses’ response to occupational fraud and recovering losses
Article published in Solicitors Journal, October 2022.
Understanding how organisations respond to fraudulent behaviour might seem like an empty exercise. However, it does provide an insight into how the aftermath of fraud and repercussions for the business including the chances of recovering the money lost to fraud.
In this article, Capcon reviews the most recent Association of Certified Fraud Examiners (ACFE) report – one of the most comprehensive sources of real-world data relating to occupational fraud.The annual report is compiled using data supplied by anti-fraud professionals, sampling over 2,000 cases from 133 countries.
When examining the aftermath of fraud, the first metric that the report covers is the action taken against the perpetrators.
Unsurprisingly the most common course of action involved terminating the employment of the perpetrator. However, the seniority and role of the perpetrator had a significant effect on the outcome. The higher up a perpetrator is in an organisation, the greater the chance is of them receiving a lesser or even no punishment.
Many fraud cases are settled exclusively within an organisation, with many substantially sized frauds not referred to law enforcement. However, a large percentage end up in civil or criminal courts.
Of the fraud schemes, 29 per cent resulted in civil litigation cases. The median loss in these was £260,000. By comparison, the median loss in cases that declined to file civil lawsuits was £61,000.
The outcome of cases that resulted in civil litigation is detailed below: –
- 39 per cent of cases settled
- 29 per cent resulted in judgment for the perpetrator
- 27 per cent resulted in judgment for the victim
Over half (58 per cent) resulted in criminal proceedings. The median loss for these was £173,000. Cases not referred to law enforcement had a median loss of £43,000.
Of the cases referred, two-thirds resulted in successful convictions, with:
- 44 per cent pleaded guilty / no contest
- 22 per cent convicted at trial
- 17 per cent resulted in a declined prosecution
- 10 per cent wacquitted
It is also worth noting that 26 per cent of fraud cases resulted in both criminal referral and a civil action.
Finally, the report shows that the types of fraud least likely to be referred to law enforcement are billing/corruption, noncash, and expense reimbursement.
Why organisations decline to report cases to law enforcement
Half of all fraud cases were not reported to law enforcement because the victimised organisation felt internal discipline was sufficient. However, many did not do so because of the potential for bad publicity. 50 per cent said that the internal action taken was sufficient
- 30 per cent were worried about the adverse effects of the publicity surrounding the case
- 28 per cent reached a private settlement with the perpetrator
- 20 per cent felt criminal proceedings would be too costly
- 10 per cent cited a lack of evidence
- 8 per cent other
- 5 per cent relied on a civil suit only
- 1 per cent of the perpetrators disappeared
Losses attributed to fraud can be devastating to a business, and regardless of the fate of the perpetrator, for many businesses, recovering misappropriated funds is their primary concern. Unfortunately, the report does not make pleasant reading on recovering fraud losses. Overall, 52 per cent of victim organisations did not recover any fraud losses. For the vast majority, this is a fruitless or at least only partially successful exercise. This highlights the importance of fraud prevention and having a robust and effective series of anti-fraud controls in place.
Lessons for the professional services sector
The sector is vulnerable to higher-end fraud. The median loss for this sector is about 20 per cent higher than the loss across all sectors. This means that the professional services sector has to make sure that due diligence is applied across the board to ensure they don’t have to worry about the aftermath of fraud.
Amongst the measures that businesses operating in the professional services sector should consider are:
- Strong external and internal auditing
- Effective segregation of duties
- External audit of internal controls over financial reporting
Prevention is by far the best medicine. What the data shows is that uncovering fraud is just the start of a business’s trouble. Legal and civil actions, the waste of valuable time – and the matter of the losses suffered all make occupational fraud a traumatic and worrying time.
Understanding the risk of workplace fraud is critical for the professional services sector. Capcon’s handy guide summarises the ACFE report, and can be read here: Capcon Guide to the ACFE Report
Ken Dulieu is an experienced white collar fraud investigator and chairman of Capcon Ltd: capcon.co.uk