Even as the federal government attempts to quash corporate fraud within U.S. companies through the Sarbanes-Oxley Act, the cost and the frequency of expense reporting scams since 2002 have increased, according to a report released last month by the Association of Certified Fraud Examiners.
This report shows the average cost of expense fraud has increased to $66,000 and now comprises about 14 percent of occupational fraud. In 2002, the average cost of such schemes totaled $60,000 and comprised 12 percent of all corporate fraud cases
(BTN, Aug. 11, 2003). ACFE's 2004 Report to the Nation on Occupational Fraud and Abuse is a follow-up to similar reports released in 2002 and 1996 and examines continued trends in fraud through more than 500 cases. Cumulatively, the frauds in the study resulted in more than $761 million in losses.
While the numbers in this year's report point to an increase in expense reporting fraud's cost and frequency, Toby Bishop, ACFE president and CEO, said they actually paint a picture of more fraud detection and more vigilant corporate oversight.
"Several factors are at play," he said. "First, the economy has grown slightly, so there inevitably is additional fraud relating to that growth. Second, enhanced scrutiny following Sarbanes-Oxley has led to more fraud being reported because more fraud is being detected. In the short term, it looks bad, but it's actually a good thing. Finally, because the economy has been struggling for awhile, people under financial pressure may have resorted to fraud and, with the passage of time, some of those frauds start becoming discovered. There's always a lag between when the economy improves and when frauds quiet down."
Since Sarbanes-Oxley regulations still are being implemented at publicly traded corporations based in the United States, its full impact on combating fraud remains to be seen. Yet, Bishop is optimistic the standards set by the federal government will improve the situation, help fraudulent incidences decrease and detection increase.
"It will have a measurable effect, but it's not going to solve the problem on its own," Bishop said. "If you read Sarbanes-Oxley and the implementing regulations, there's relatively little in there that is devoted to increasing the likelihood that frauds will be detected. There's a strong emphasis on deterrence, but we have a lot more work to be done to increase fraud detection."
The report shows the best ways for companies to both deter and detect fraud are through such confidential reporting mechanisms as hotlines through which employees and others can report abuses.
"The median loss among organizations that had anonymous reporting mechanisms was $56,500," according to the ACFE report. "In organizations that did not have established reporting procedures, the median loss was more than twice as high."
"Our report shows very clearly that confidential reporting mechanisms are the most effective way that frauds can be detected," Bishop said. "While Sarbanes-Oxley only mandated such mechanisms for employees, approximately 40 percent of tips typically come from suppliers, customers and other sources. Companies that have rushed to implement a hotline [only for employees] to comply with Sarbanes-Oxley may need to revisit the issue if they truly want to detect as much fraud as possible.
"There are additional specific things that can be done with travel expense reporting fraud, especially with new technology," Bishop added. Such technology includes automated systems provided by expense reporting vendors that help improve oversight and red-flag expense reports that are out of policy
(BTN, Oct. 27, 2003).The report also found a correlation between corporate tenure and rank and the severity and cost of fraud. The cost of frauds committed by owners and executives are 14 times higher than the losses caused by other employees—a finding that poses a dilemma for many companies.
According to a survey of 228 auditors released late last year from the trade organization Global Auditing Information Network, almost 8 percent of respondents said their CEOs' expense reports go unaudited. Although 71 percent of the respondents surveyed indicated their companies' internal audit departments perform expense report audits, Bishop said even this practice poses problems.
"Since the CEO is often the top person in the company, I'm not sure any junior executive is going to question the boss's expenses—even if they were assigned the task of reviewing them," he said. "That would have to be done by someone on the audit committee or the chairman, if that is a non-executive position. It's a very interesting point because there have been prior examples where the chief executive was committing huge T&E frauds—even charging a car through expenses—and either no one was looking, or people saw it and didn't dare question it."
While the ACFE survey looked at companies of all sizes in public, private, government and non-profit sectors, the report found, "Given their relative size, the impact on small businesses from the occupational frauds was much greater than the impact on larger companies."