Asia-Pacific companies losing $300,000 to fraud

By Jo Javan A. Cerda

ORGANIZATIONS IN Asia-Pacific, including the Philippines, lost $300,000 to fraud in January 2008 to December 2009, according to a report from United States-based Association of Certified Fraud Examiners (ACFE) released Wednesday.

The amount, the median for the region, was culled from reports of certified fraud examiners who investigated 1,843 cases from 106 nations, with more than 40% outside the US.

ACFE did not indicate the criteria in choosing companies to be investigated.

Fraud schemes were lumped into three categories, namely, asset misappropriation, defined as stealing and misusing resources; corruption to include bribery, extortion and conflicts of interest; and manipulation of financial statements to record fictitious revenues, concealing liabilities or expenses and artificially inflating reported assets.

The Asia-Pacific median loss was "significantly higher" than the global median loss of $160,000, according to the report, entitled "Report to the Nations on Occupational Fraud and Abuse Asia-Pacific Edition."

Of the 338 fraud cases in the region, China posted the most number of cases (62), followed by India (37), Australia (29), Indonesia (27) and the United Arab Emirates (27).

For the Philippines, said Scott Patterson, ACFE media relations specialist, 16 case studies showed organizations lost a median of $100,000 per scheme.

He said in an e-mail response that expense reimbursement in the form of claiming personal travels and nonexistent meals was the most prevalent irregularity with a total of six cases; followed by fund misappropriation stealing from the company vault, with four incidents.

Other fraudulent acts committed by Filipino employees include skimming or pocketing of money from an unrecorded sale (three cases); billing the employer for a service not rendered and purchasing personal items and submitting invoice to employer for payment (three); bribery, extortion and conflicts of interest (three); voiding of a sale and stealing cash (two); claiming overtime for hours not worked or adding ghost employees to the payroll (two); stealing of blank company checks or outgoing checks to a vendor (two); stealing cash and checks from daily receipts before these are deposited (one); and intentional misstatement of material information in financial statements (one).

The report said respondent estimate that an organization loses about 5% of annual revenue to fraud, which usually lasted a median of 12 months before discovery or detection.

It added that asset misappropriation was the most common type of occupational fraud, occurring in 80% of all cases. However, financial statement fraud was found to be the most expensive category, with a median loss of $4.3 million.

Forty-three percent of fraud cases were also detected through a tip. It was the most usual fraud detection practice compared to a management review and internal audit, the report said.

Meanwhile, the most effective anti-fraud controls, as measured by results of tests conducted on respondents, were surprise audits and hotlines.

Each measure helped reduce more than 40% in the median fraud loss per case, ACFE said.

Most of the fraud committed were in a private company, accounting for 42.5% of all cases. Publicly listed companies made up 39.8% of total incidents, government companies 15.6% and nonprofit companies 2.1%, it said.

Biggest losses were incurred by government companies with a median of $439,000, followed by public companies at $362,000, nonprofit organizations $338,000 and private companies at $250,000.

Organizations with more than a thousand employees reported the most number of incidents at 30.9%.

Of industries surveyed, 20.2% of total cases were found in the banking and financial service sector, while the biggest median loss of $2 million were posted by companies in the mining industry.

Occupational fraud

Based on the performance of officials and employees, ACFE said the report found out that occupational fraud committed by company owners and executives were the most expensive at a median $1 million.

Losses caused by managers were at $242,000 and those by employees at $200,000. Fraudulent acts committed by individuals working in sales, accounting, operations, upper management and purchasing accounted for 76% of total occupational fraud.

About half of culprits were managers, 34% were employees while 16% were owners.

Males accounted for 84.3% of all fraud cases, higher than the global figure of 67%. Males make up for a median loss of $300,000, higher than the $215,000 median loss attributable to females.

By age group, ACFE added that about 60% of those who committed fraud were between the ages of 31 and 45.

However, losses tend to increase with the age of the perpetrators. Major losses were caused by those aged 46 and above.

The report said that based on tenure, about a half of the fraud was committed by those who have stayed one to five years in the company, but those who spent six to 10 years caused the biggest loss at a median of $416,000.

Half of those involved in fraud have a college degree, according to ACFE, while those who attained a postgraduate degree caused the most expensive loss at a median $333,000.

More than a third of all cases were committed by individuals who were living beyond their means, while another third were committed by those with unusually close association with vendors or customers.

Those who were experiencing financial difficulties accounted for 22.7% of cases, the report said.

ACFE added that 85% of fraud perpetrators had never been charged with or convicted with a prior criminal offense.

Meanwhile, a paper presented in a forum yesterday by Juan Carlos B. Robles, risk management partner at accounting firm Punongbayan & Araullo, noted that fraud management programs should involve risk assessment, prevention, detection, investigation and reporting and response.

Companies that implement ethical guidelines, fraud training and compliance systems are less susceptible to fraud, the briefing paper noted. Responses to fraud, it said, include criminal referral, civil action, disciplinary action, insurance claim, extended investigation, business process remediation and internal control remediation.

ACFE has released five updated editions since the launch of the report in 1998: in 2002, 2004, 2006, 2008 and the current version in 2010. 

(As published in BusinessWorld, 26 November 2010.)