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New ACFE Study Highlights the High Cost of White-Collar Crime

Posted by Meaden & Moore on Jan 25, 2021 10:00:16 AM

Businessman in HandcuffsEvery two years, the Association of Certified Fraud Examiners (ACFE) publishes a study detailing the latest costs, schemes, perpetrators, and victims of occupational fraud. Report to the Nations: 2020 Global Study on Occupational Fraud and Abuse was released in early 2020. 

Consistent with previous versions of this study, the 2020 report estimates that U.S. businesses typically lose 5% of revenue each year to fraud. This can have a significant negative impact on business value. 

Assessing Fraud Risks

Valuation experts must consider fraud risks when estimating future income and discount rates. Small businesses generally lose more to fraud than large businesses. Globally, the median loss caused by the frauds in the 2020 study was $125,000. However, the median loss for organizations with fewer than 100 employees was $150,000, roughly 20% higher than the overall median. 

Size also may determine the schemes to which a company is most vulnerable. For example, companies with fewer than 100 employees are two times more likely to be victims of billing and payroll scams and four times more likely to experience check and payment tampering than large ones. Conversely, corruption and theft of non-cash assets are more common at larger organizations. 

Mitigating Risk

Internal controls over financial reporting (ICFR) are a company’s first line of defense against employee theft and financial misstatement. Unfortunately, the study found that 43% of the victim organizations with fewer than 100 employees lacked effective internal controls, compared to 28% of larger victim organizations. An ineffective internal control system increases the potential risk of fraud.

The ACFE has identified the following controls as effective means of reducing fraud losses:

Anti-Fraud Control Percent Reduction in Fraud Losses
Code of conduct

51%

Internal audit department

50%

Management certification of financial statements 50%
External audit of ICFR 50%
Management review 50%
Reporting hotline 49%
External audit of financial statements 46%
Employee fraud training 38%

 

Investors and lenders generally perceive companies that have implemented these controls as less risky than other organizations with fewer or less effective anti-fraud controls in place. 

Adjusting for Fraud

Business valuations typically aren’t designed to unearth fraud. However, valuation experts rely on financial statements to estimate value. If financial statements contain fraud, a business valuation will be inaccurate, unless properly adjusted. 

During the valuation process, an expert could unearth red flags of fraud. In these situations, the expert might ask a client to expand the scope of the engagement to include forensic accounting services. This expert can help make the requisite adjustments to accurately value the business and build a fraud case, if necessary. 

Risky Business

Fraud can unexpectedly strike any business, large or small. But certain situations – such as shareholder disputes and divorces – can create motives to hide assets and downplay income. Experts are particularly mindful of fraud risks when valuing a business for these purposes. 

Likewise, valuators must be diligent about fraud risks during the COVID-19 crisis. Financial distress and market uncertainty can motivate employees to steal or falsify statements – and liberalized management oversight while employees work remotely may compromise a company’s ICFR. This can create opportunities to misstate financial results. If you suspect fraud, discuss it with your valuation professional or a forensic accountant. 

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