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Test Your Fraud IQ
I f you think occupational fraud and abuse can't happen at your company, think again. Fraud
is a global epidemic. In a recent study, the Association of Certified Fraud Examiners (ACFE)
estimates that the typical business loses 5 percent of its revenues each year to fraud. Put
another way, this equates to $50,000 for every $1 million in annual revenues.
Part of the problem is that many owners and managers believe they're too smart to be duped by
a fraudster. But fraud awareness is often a company's first line of defense against white collar
crime. Test your fraud IQ with this 10-point quiz (the answers are below):
1. What's the most common way to catch a thief? a.
Employee tip b.
Management review c.
CPA audit d.
Accidental discovery
2.
When a perpetrator is caught, what is
the average amount of time that lapsed
between commencement of the fraud
scheme and detection?
a.
6 months b.
1 year c.
18 months d.
5 years
3. Which type of asset do fraudsters steal most often?
a.
Cash b.
Accounts receivable c.
Inventory d.
Equipment
4. What do you call a method of concealing receivables skimming by crediting
one account with money stolen from a different account?
http://www.bizactions.com/n.cfm/page/e120/key/284210377G1367J6848063N0P0P2464T2/[11/20/2014 8:54:35 AM]

a.
Kiting b.
Lapping c.
Swapping d.
Account substitution
5. Which of the following are examples of vendor fraud schemes that cause
companies to overpay for personnel, services and goods?
a.
Fictitious invoices b.
Double-billing scams c.
Commingling of contracts d.
Change order abuse e.
All of the above
6.
Who steals more from retailers?
a.
Employees b.
Shoplifters
7. Which of the following is a red flag that contractors are working together in a
bid-rigging scheme?
a.
Fewer qualified bidders respond to the request than normal b.
The winning bid is unusually high c.
The losing bidders end up as subcontractors when work is
performed d.
All of the above
8. Which of the following technology snafus is least likely to result in a data
breach?
a.
Thefts of encrypted laptops b.
Unsecured wireless networks c.
Failure to download the latest updates to network security
systems d.
Stolen passwords
9. How many firms that unearth fraud never recover a dime?
a.
8 percent b.
38 percent c.
58 percent d.
88 percent
10. What percentage of business failures are attributed to internal fraud?
a.
13 percent b.
33 percent http://www.bizactions.com/n.cfm/page/e120/key/284210377G1367J6848063N0P0P2464T2/[11/20/2014 8:54:35 AM]

c.
53 percent d.
73 percent
1. a.
Tips are the most common fraud
detection method, accounting for more than
40 percent in cases reporting in the latest
ACFE study. Employees made about half of
all tips that led to the discovery of fraud in
the ACFE study. This proves that insiders
often know about co-workers' unethical
behaviors. So, it's important for
organizations to make it as easy as possible
for employees to make anonymous tips
without fear of retaliation. It's also crucial to
follow up on tips and to punish wrongdoers.
2. c.
The median duration for the fraud cases reported was 18 months,
according to the ACFE's 2014 Report to the Nations on Occupational Fraud
and Abuse .
3. a.
Cash is involved in approximately 90 percent of all misappropriation (theft)
cases. Other scams involve the misuse or theft of inventory and other noncash
assets. Common cash schemes include larceny, kiting and fraudulent
disbursements.
4. b.
Lapping occurs when an employee steals a remittance from Customer 1
and later covers it up by applying a payment from Customer 2 to Customer 1's
account. Customer 3's payment is posted to Customer 2's account (and so on)
until the thief repays what's been taken or gets caught.
5. e.
All of these scams are just some of the ways vendors can artificially inflate
their revenues, which, in turn, causes their customers to incur higher expenses.
Fictitious invoices are the most straightforward way to defraud customers by
sending bills for items never delivered. A slight twist is a double-billing scam in
which the vendor invoices the customer more than once for items delivered --
often under a new invoice number but using the same delivery date and line
items as the previous order's. These schemes often involve collusion between
the vendor and someone inside the victimized organization.
Commingling of contracts occurs when a supplier bills for the same expenses
under multiple contracts. To ward off these scams, managers need to carefully
review each contract to ensure the work performed isn't duplicated in another
contract. Change order abuse is a problem in construction and other industries
that use long-term contracts. Once they've won the bid, contractors may use
inflated change orders to make up for low bid prices. That's because customers
tend to scrutinize change orders less closely than the original contract.
6. a.
The ACFE estimates that 30 percent of retail losses are from shoplifters
and 70 percent of thefts are committed by employees.
7. d.
When competitors work together to secure a high priced bid, it's called bidrigging -- and it causes customers to overpay for goods and services.
Sometimes employees are involved to make sure that the fraudster isn't
underbid by an unexpected bid submission from someone outside the group of http://www.bizactions.com/n.cfm/page/e120/key/284210377G1367J6848063N0P0P2464T2/[11/20/2014 8:54:35 AM]

fraudulent bidders.
8. a.
Laptops are mobile, making it easier for employees to work from home. But
mobility also makes laptops vulnerable to theft. Encryption can substantially
reduce the risk of data breach when laptops are stolen. Encryption encodes
data, requiring users to enter special passwords and keys to gain access.
9. c.
Nearly three-fifths of companies recover none of their fraud losses.
Financial recovery takes time and effort. Many companies sweep fraud under
the rug to avoid bad press and legal fees associated with pursuing criminal
action against the perpetrator. But going after wrongdoers can help companies
recoup losses and set a powerful example to other would-be fraudsters. In the
2014 ACFE study, 14 percent of the victims fully recovered their fraud losses.
10. b. The ACFE estimates that about one-third of business failures are due to
internal fraud. Many of these failures involve small businesses, which tend to
be disproportionately affected by white collar crime and abuse. Often these
organizations don't have enough resources to absorb fraud losses and
frustrated business owners eventually close shop. Stronger fraud prevention
and prosecution efforts can help reduce losses, however.
The term "risk" has many different meanings. On one hand, risk could be
measured by the prevalence of fraud schemes. Based on this interpretation,
the ACFE's 2014 Report to the Nations on Occupational Fraud and Abuse
reports that the following industries had the highest number of reported fraud
cases:
1.
Banking and financial services,
2.
Government and public administration,
3.
Manufacturing,
4.
Health care, and
5.
Education.
While the ACFE list demonstrates the distribution of cases in this study, it does
not necessarily mean that these industries are more at risk of fraud than others.
It could also be a sign that they're more proactive in dealing with antifraud
issues.
Another measure of risk is the likelihood that an investor or creditor will receive
a negative return on an investment in a particular industry over 12 to 18
months. Using this alternate interpretation of risk, another recent study, Top 10
Riskiest Industries of 2014-2015, published by research firm IBISWorld in
October, reports that the most risky industries are:
1.
Appliance repair,
2.
Recordable media manufacturing,
3.
Cigarette and tobacco products wholesaling,
4.
Vacuum, fan and small house appliance manufacturing,
5.
Cigarette and tobacco manufacturing, http://www.bizactions.com/n.cfm/page/e120/key/284210377G1367J6848063N0P0P2464T2/[11/20/2014 8:54:35 AM]

6.
Women's and girls' apparel manufacturing,
7.
DVD, game and video rental,
8.
Computer manufacturing,
9.
Corn farming, and
10.
Men's and boys' apparel manufacturing.
Many of these industries are in a state of decline or face intense competition
from global suppliers. In turn, weak financial performance and pressure to meet
stakeholder expectations could motivate employees and managers in these
high-risk industries to commit fraud.
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