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In May 2000, Ernst & Young LLP released its report, The Unmanaged Risk: An International Survey of the Effect of Fraud on Business. This survey queried senior executives from 10,000 major organizations representing more than 30 industries in 15 countries. The survey concluded that 82 percent of all known frauds were committed by employees, and about one-third of these were committed by management. While managers did not commit the preponderance of frauds, one can conclude that as a percentage of the total employee population, their fraud rates were significantly higher than the general fraud population. Also, one would suspect, given their higher levels of influence, scope, and authority, their frauds were likely to be more serious.18
Even among security professionals, persons usually concerned with matters of executive protection, workplace violence, terrorism, and drugs in the workplace, occupational fraud may be found to exhibit a rather high profile. In 2002 Pinkerton completed its ninth annual Top Security Threats and Management Issues Facing Corporate America survey of Fortune 1000 corporations. Asked to rank 23 security threats, from workplace violence to product diversion/transshipment, fraud/white-collar crime was viewed as the sixth most important threat area, surpassed only by workplace violence, business interruption/disaster recovery, terrorism, computer crime, and employee selection and screening. Since 1997, fraud/white-collar crime had never ranked lower than seventh on the prior surveys and was once ranked as high as third. In terms of industry sectors,
fraud/white-collar crime in 2002 ranked highest in retail (third) and lowest in utilities and manufacturing (eighth). Such perceptions on the part of security professionals are perhaps made more remarkable by the fact that only 3 percent of them report to the audit department of their corporation and only 33 percent have any formal coordination arrangement with that department.19
There is perhaps yet another way to try to comprehend the enormity of the occupational fraud problem in the United States as estimated by Wells. If we think of all the hamburger chains in the United States, all of the chicken chains, all of the taco chains, all of the pizza chains, all of the donut chains, indeed, all of the fast-food business, we are dealing with an industry that does $100 billion per year in business.20 Fraud may be six times bigger.
Recently, during the course of a radio interview, Texas Ranger superstar shortstop Alex Rodriguez was asked how he felt about the state of baseball, which had been the subject of much talk about salary inflation, league contraction, and labor problems. Rodriguez replied to the effect that there was really nothing to worry about, since baseball was a $3 billion business.211 am sure Mr. Rodriguez is probably right about the gross revenues of baseball. There are 30 teams, and each plays from April to October, if they are lucky. Each has thousands of seats filled every night, parking, concessions, luxury boxes, logos on merchandise, television rights, and licensing deals. That is where the $3 billion gross number comes from. Yet, all of baseball in a given year may be less than three days of occupational fraud in the United States.
It has been publicly reported that credit cards are the most popular form of payment for purchases, totaling about $1.29 trillion last year, with about $400 billion of that amount being carried by consumers as debt. Compared to occupational fraud losses, then, all credit purchases are about twice as big and all credit card debt is about two-thirds as big.22 Each year!
We hear much about the mind-boggling profits that are made in the drug trade and how these immense numbers provide the basis (and money) for the corruption of politicians, cops, judges, customs officials, and others around the world. Lest we wonder, please consider the magnitude of the drug dollars floating throughout the world. A United Nations’ study estimates international drug profits to be $400 billion per year.23 Impressive? Yes. But it is about where we were five years ago with occupational fraud in the United States and only two-thirds of where we believe we are now.
Finally, believe it or not, occupational fraud in a given year may be about two-thirds the value of the federal government, with a few important disclaimers. The 2002 Federal Financial Management Report, reports this number thusly: “The balance sheet of the Federal Government shows a historical value of over $900 billion in physical and financial assets. This estimate is not comprehensive because it does not include natural resources, stewardship land (national parks, forests, and grazing lands), national defense assets, or heritage assets (e.g., the Hope Diamond).”24
THE STATE OF OCCUPATIONAL FRAUD
Hopefully, such numbers provide us a rudimentary basis for beginning to comprehend just how big occupational fraud is today. The bad news is that we may not even have all of it counted, even at the $600 billion level.