A Quick Statement of the Problem
Although it is seemingly an impossible task to calculate the total cost of fraud losses on Americans individually as well as on American businesses, the Association of Certified Fraud Examiners (ACFE), home based in Austin, Texas, has been studying the problem since its inception in 1988. The ACFE and its membership are the acknowledged experts who investigate all levels of fraud, and they focus on training anti-fraud professionals and studying effects of fraud across the United States. This year, the ACFE issued its second report to the nation relative to frauds against businesses.
Gross domestic product for the US economy is estimated to be $10 trillion this year. Business losses due to fraud are estimated at $600 billion. Please note that this does not include insurance fraud, income tax fraud/evasion and the myriad of frauds against individuals.
The US Department of Commerce has estimated that after five years three out of five new businesses fail. Frauds against those businesses account for 40% of the failures.
The largest fraud against the US economy is income tax fraud/evasion. This loss is due to uncollected taxes from underground economies and cash businesses. It is also due to understated income and inflated deductions on many tax returns.
Depending on whose statistics you believe, insurance fraud losses are estimated between $85 to $135 billion.
Putting all this in perspective so as to fully realize the impact of fraud on the American economy, recognize that all forms of fraud could exceed one trillion dollars this year and that is more than 10% of total US gross domestic product. More alarmingly it is equal to approximately 50% of the 2002 Federal Budget.
Everyone’s efforts to reverse the growth of fraud does not seem to be working. The Association of Certified Fraud Examiners estimated in 1996 that fraud was growing at an annual rate of 10%. In their 2002 Second Report to the Nation on business fraud, their studies over the last six-year period found fraud growth figures consistent with their previous study.
And there are other factors:
Economic upswings and downswings affect the filings of insurance claims, the increases of frauds committed against individuals and businesses, and they similarly affect the filings of bankruptcies.
Inversely, bankruptcies are a barometer of the economy! Mike Kessler, a New York City certified fraud examiner who owns and manages a leading forensic accountant and private investigation firm, recently conducted an anonymous nationwide survey of bankruptcy judges, administrators, trustees and lawyers in an effort to develop statistics relative to bankruptcy fraud. Over the years, he has found that this type of fraud severely affects the prosperity of corporate economies. It is one of the simplest ways to steal since the chances of getting caught are slim to none.
Mr. Kessler found that during the first quarter of 2001 there were almost 367,000 bankruptcy filings. This number was up 24% over the same quarter for the previous year. Further, while last year’s statistics were available from the federal government (1999), during that entire year, only 188 criminal actions were undertaken by the US Department of Justice relative to bankruptcy fraud.
The usual drill employed by bankruptcy fraudsters is to (as within income tax evasion) overstate expenses and not include assets on petitions. Recognize that the courts do zero investigation, and it is up to victims (usually businesses) to prove abuse.
How have we gotten to this point of economic devastation?
We have only ourselves to blame! Just as fraud victims are induced by fraudsters to rely on their false statements, most of us believe that it is not our problem and that it’s not going to happen to us. Alarmingly, it is estimated that over 80% of Americans have been defrauded in some manner.
Remember, all fraud needs to prevail is for good people to do nothing! Fraud is prevailing, and apathy and ignorance are fueling it!
There is effective action that can be taken.
Most fraud is best prevented through the following. They are listed from most effective to least effective:
Strong internal control in business.
NOTE: Eliminating eternal control weaknesses by employing effective checks and balances, segregating duties, etc., in all organizations sends a loud and clear “trust but verify” message. But the one huge stumbling block to sending a zero tolerance message to employees, customers, vendors, etc., is the issue relating to cost of detection and negative publicity associated with prosecution. Key personnel in organizations don’t understand that these are integral parts of deterrence, and this allocation of energy and capital will return many times over the investment of every dollar.
Background checks on new employees.
Regular fraud audits.
Establish fraud policies.
Willingness of companies to prosecute.
Ethics training for employees.
Anonymous fraud reporting mechanisms.
Workplace surveillance.
It is up to all of us to deal with the issue of fraud! It is not going away; it is highly profitable and relatively risk free, and it is almost socially acceptable.
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