Corruption. It’s a word you hear most in context with crooked politicians, bad cops or unstable foreign governments.
But corruption is also a big problem for businesses. In fact, corruption schemes are at the root of more than one-third of employee fraud at large businesses, according to the most recent biannual report of the Association of Certified Fraud Examiners.
What exactly is corruption? It’s a scheme in which an employee misuses his or her influence in a business transaction to gain direct or indirect benefit.
Corruption comes in many forms:
- Bid rigging
- Conflicts of interest
- Economic extortion
- Illegal gratuities
- Invoice kickbacks
- Purchasing schemes
The median loss to a company from a corruption scheme is $250,000, based on the losses of hundreds of fraud victims in the ACFE study. The median duration of corruption schemes was 18 months.
How is corruption detected?
Overwhelmingly by employee tips – 54 percent. In fact, tips were more effective in bringing corruption cases to light than any other type of employee fraud. In asset misappropriation and financial statement fraud, employee tips detected 42 percent of crimes.
Internal audits were the second most effective way of finding corruption – 14 percent of cases. Management reviews discovered 12 percent of corruption cases.
Corruption is a significantly bigger problem overseas than it is in the United States. It is the leading kind of fraud in Asia, Africa, Europe, Latin America, the Caribbean and Oceania.
In the United States and Canada, corruption is a bigger problem with larger companies, but less so with smaller ones. In small U.S. businesses, about one-fourth of cases involved corruption.
Overall, there were more billing schemes in the United States and Canada, though the number of corruption schemes grew by more than 3 percent in the United States in the two years since the previous report.
The industries in which most corruption cases took place were banking and financial services, government and manufacturing. Education and retail also had a large number of cases.
Within an organization, the most corruption happens at the top – in executive and upper management.
Corruption schemes were by far the most common type of fraud perpetrated by top management – 85 cases for 54 percent. Corruption was also the leading type of employee fraud committed in the sales, operations, purchasing and customer service departments.
The purchasing department had fewer cases of fraud, but a higher percentage of those cases involved corruption – 68 percent.
The only department in which corruption is not the leading type of fraud is the accounting department where, not surprisingly, billing schemes, check tampering, skimming and payroll fraud cases outnumber corruption cases.