United States

How the fraud environment has changed given the pandemic

INSIGHT ARTICLE

One of the many challenges organizations are facing during the COVID-19 pandemic is a growing threat of fraud. As overall risks, perceptions and actual levels of fraud evolve, organizations are finding it necessary to implement new or modified anti-fraud programs.

The rising threat is reflected in the latest findings of the Association of Certified Fraud Examiners. Every two years the ACFE conducts a series of global surveys on occupational fraud and abuse—the largest study of its kind—to gather information on the costs, schemes, victims and perpetrators of fraud. Survey respondents are geographically diverse and represent a wide range of industries.

The ACFE released its most recent results, compiled in 2020, in its Report to the Nations in April 2020, as well as in three benchmarking reports, released in June, September and December of last year. Highlights are provided below.

Types of fraud

The ACFE categorizes occupational fraud as follows:

  • Asset misappropriation: An employee steals or misuses the employer’s resources (e.g., through theft of company cash, false billing schemes or inflated expense reports).
  • Financial statement fraud: An employee intentionally misstates or omits material information in the organization’s financial reports (e.g., by recording fictitious revenues, understating reported expenses or artificially inflating reported assets).
  • Corruption: An employee misuses their influence in a business transaction in a way that violates their duty to the employer, to gain a direct or indirect benefit (e.g., through schemes involving bribery or conflicts of interest).

In the ACFE’s April 2020 Report to the Nations, survey participants reported 2,504 cases of fraud from 125 countries. Collectively, 86% of those cases involved asset misappropriation, 43% involved corruption and 10% involved financial statement fraud. For median loss per occurrence, asset misappropriation was the least costly, at $100,000; corruption cases were $200,000; and financial statement fraud was the costliest, at $954,000.

The previous edition of the Report to the Nations, from 2018, captured pre-pandemic information for 2,690 cases of fraud from 125 countries. Comparisons between the 2018 and 2020 editions indicate some shifting among the types of fraud committed:

  • Asset misappropriation and financial statement fraud remained the least and most costly from 2018 to 2020, respectively, although the median loss per occurrence from asset misappropriation declined slightly, from $114,000 to $100,000.
  • The occurrence rates for asset misappropriation remained relatively stable, at 89% of cases in 2018 and 86% in 2020.
  • Corruption schemes increased in 2020, while financial statement fraud remained largely unchanged. In 2018, corruption occurred in 38% of the cases studied with a median loss of $250,000 per occurrence, while financial statement fraud occurred in 10% of the cases studied, resulting in a median loss of $800,000 per occurrence. The increase in corruption schemes and the consistency of financial statement fraud may indicate changing dynamics for the overall opportunities to commit these types of frauds within the pandemic environment.

The 2020 survey responses indicated a significant upward trend in the overall level of fraud, as shown in Figure 1. As of May 2020, 68% of participants had observed an increase, and that percentage rose to 77% as of August 2020 and 79% as of November 2020. In November, 90% of respondents expected an additional increase in the overall fraud level over the next 12 months.

Specific fraud risks

The ACFE reports on 12 categories of fraud risk. The April 2020 Report to the Nations showed that a majority of participants anticipated an increase over the next 12 months in many categories, particularly cyberfraud.

As of May 2020, 81% of participants had observed an increase in cyberfraud within their organizations, as seen in Figure 2. By August, that number had grown to 83%, and by November it had increased to 85%, with 88% of participants expecting it to increase further over the next 12 months.

In the November 2020 survey, financial statement fraud presented the lowest risk area for anticipated growth—however, as Figure 3 shows, 68% of participants expected an increase over the next 12 months. Reports of financial statement fraud grew during 2020, with 30% of participants observing an increase in May, increasing to 41% in August and 46% in November.

Approximately three quarters of November 2020 respondents anticipated growth during the next 12 months in most of the remaining 10 categories of fraud risks tracked by the ACFE. Specifically, approximately 80% expected increased payment fraud, identity theft, unemployment fraud and fraud by vendors and sellers. Between 70% and 80% also expected more fraud involving health care, insurance, loans and banking, bribery and corruption, bankruptcy and employee embezzlement during the next year.

Anti-fraud programs

Survey responses indicated a heightened need for strong anti-fraud programs. In November 2020, 41% of participants anticipated increasing their overall budget for anti-fraud programs over the next 12 months. Just a few months earlier, in August 2020, that figure was only 38%.

November 2020 respondents also anticipated greater willingness to invest in anti-fraud technology during the next 12 months, with nearly half planning to increase their budget for that purpose. Furthermore, most participants expected budgets for anti-fraud staffing, external resources and training to increase or at least remain constant over the next 12 months.

Ability to fight fraud

All three 2020 benchmarking reports surveyed the effects of COVID-19 on the ability to fight fraud through prevention, detection and investigation.

A majority of respondents to all three surveys expected their organization to increase anti-fraud activities in response to the greater difficulty of detection. As of June 2020, 74% of participants described prevention as having become more challenging in the current environment, and this figure grew to 76% and 77% in August and November 2020, respectively. In November most respondents also reported growing difficulty in investigation, as shown in Figure 4.

All 2020 survey results characterized the overall anti-fraud environment as challenging, with respondents ranking inability to travel, challenges in conducting interviews, lack of direct access to evidence, canceled or postponed engagements or investigations, barriers from data privacy/security, changes in controls due to a remote workforce, and communication challenges and delays as the greatest obstacles.

Inability to travel remained the most prominent challenge in all three benchmarking reports, with approximately 40% of survey participants citing this issue. Lack of direct access to evidence was also a prominent concern, with approximately a third of survey participants citing this challenge in all three surveys.

The difficulty in conducting either live or remote interviews grew in 2020, with more than a third of survey participants citing this issue in November compared to only a quarter of participants earlier in the year.

If 2020 is an indication, cancellation or postponement of engagements or investigations may decrease as companies adjust to the new environment in the United States. In May 2020, 35% of survey participants reported cancellation or postponement, but in November that figure dropped to 29%.

KEY TAKEAWAYS

Organizations have always faced the risk of fraud, but the ACFE 2020 survey results indicate that both the opportunities to commit fraud and the risks from failure to detect it may be growing. In addition, the challenges in combating fraud are expected to continue evolving. To address these challenges, organizations should develop and maintain proactive approaches to investing in and operating anti-fraud programs. The COVID-19 pandemic has transformed business operating environments and the motives and means for fraud to occur. As we emerge from the pandemic, it is incumbent on all of us to respond.

RSM CONTRIBUTORS


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