Keeping Fraud in the Cross Hairs: Report Highlights Common, Costly Schemes and Makes Prevention the Target

Article excerpt

Five percent of annual revenue--that's the estimate of how much money the typical organization loses to fraud, according to participants in the 2010 Report to the Nations on Occupational Fraud and Abuse.

The report, prepared by the Association of Certified Fraud Examiners, an international organization of more than 50,000 fraud examiners, CPAs, law enforcement professionals, government officials and others, examines a wide swath of business-related fraud in an effort to pinpoint problems and highlight solutions. The fraud cases at issue in the report lasted a median 18 months before being detected. While million-dollar-plus financial statement frauds made up a small percentage of the crimes, the majority were less complex asset misappropriation cases involving billing, check tampering, payroll and expense report schemes.

Joseph T. Wells, CPA, CFE, has made the study of such frauds and their fallout his life's work. After a stint on the audit staff of Coopers & Lybrand, Wells became an FBI special agent. His decade of work with the FBI included investigating former U.S. Attorney General John Mitchell's role in the Watergate cover-up. In 1982, Wells left the FBI to form Wells & Associates, a firm specializing in fraud detection and prevention. He created and became chairman of the Association of Certified Fraud Examiners in 1988.

Wells discussed with the JofA the 2010 report and how CPAs can put the findings into practice. Excerpts from the discussion follow. Read more online at or read the full report, released June 2, at

JofA: What was the most surprising finding in this year's report?

Wells: Perhaps the most striking--if not exactly surprising--finding is the overall consistency of our data from one study to the next, m terms of the losses, schemes, detection methods and perpetrators of occupational fraud. This is our sixth study of this nature, and each time we've noted remarkable evenness in these trends. Now, with international data for the first time, we can see that the fraud problems of non-U.S. companies are much the same as our own.

JofA: Accounting departments appear to be particularly vulnerable to fraud schemes, according to the report. Any observations/suggestions related to that finding?

Wells: If we drill down into asset misappropriation schemes, we classify them as "cash" and "other assets." Historically, over 80% of all asset misappropriations are cash. The accounting department is the financial nerve center of the organization, where receipts and disbursements are documented. It would therefore be logical to be a target of insider misdeeds. One of the three key elements to the fraud triangle is opportunity, and obviously, the people who deal with incoming and outgoing cash on a daily basis are going to have greater opportunities.

Ironically, in most organizations the accounting department is the place where controls are most strongly enforced, and yet we're still seeing more fraud there than anywhere else. This shows that traditional controls alone are insufficient to keep occupational fraud from occurring. A large part of the reason is that accounting department employees are more likely than just about anyone in the company to be familiar with the controls and how to develop methods to circumvent them.

JofA: The report takes a detailed look at asset misappropriations and their toll. What are the most effective ways to snuff out threats such as billing schemes, one of the most common and costly occupational frauds?

Wells: Billing schemes are common because they're easy to commit, especially in a small business environment. The typical billing scheme is where an employee causes a payment to be issued to either a nonexistent vendor or to a company controlled by the employee. Many employees in these situations have checks sent to their residence. So there are several simple steps that will help prevent or detect billing schemes. …