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Certain types of leaders are skilled at manipulating employees and internal controls to serve their own needs, with occasionally disastrous (read: costly) results.
According to the Report to the Nations: 2020 Global Study on Occupational Fraud and Abuse, published by the Association of Certified Fraud Examiners (ACFE), fraud costs organizations 5% of revenue each year, with an average loss per case of more than $1.5 million. Equally frightening is the fact that a typical fraud case isn't uncovered for a median of 14 months after the malfeasance begins-and in some cases five years or later-allowing plenty of time for the losses to pile up.
Lawmakers, regulators, the accounting profession, and corporate boards have taken many notable actions over the past two decades to prevent and detect occupational fraud, including the passage of the Sarbanes-Oxley Act of 2002, the establishment of the Public Company Accounting Oversight Board (PCAOB), the issuance of Statement on Auditing Standards (SAS) 99 (now AU Sec. 316), the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the increased inclusion of financial experts and independent shareholder advocates to public company boards.
Yet despite these efforts, occupational fraud continues to be a major problem for organizations, as the latest ACFE numbers make painfully clear. Accordingly, as a management accountant or other financial professional, you're probably increasingly on the lookout for any additional measures that could potentially serve to detect and prevent fraud. But before you can decide on the tools you'll need to protect your company, you'll have to better understand the specific types of threats you're likely to face and, more importantly, the clues that can tip you off to them.
The Pervasiveness of Fraud
The ACFE's 2020 Report to the Nations indicates that occupational fraud-fraud perpetrated by directors, officers, or employees of the organization-continues to be a major threat, with the largest median losses ($954,000) occurring in the area of financial statement manipulation, even though these schemes comprise just 10% of all occupational fraud.
You're probably thinking, "That can't happen to us. We have good internal controls." Well, guess again. Research indicates that even organizations with strong internal controls fall victim to occupational fraud since senior management is often able to override or ignore such...