2020 Credit and AR Department Fraud Survey: Part 1

Surprisingly, dealing with frauds in 2020 appeared to be a glass half full occasion for many organizations. Credit teams were not overwhelmed with fraud attacks and for the most part, they were able to combat fraud. Even so, organizational efforts to mitigate frauds were not viewed in a positive light. Companies accept that more than minimal efforts are being made to fight frauds within the credit organization and the order-to-cash process. However, they believe a lot more could be done easily that might fill the glass further, if not all the way to the brim.

Executive Summary

• Roughly 6 out of 10 credit organizations (60 percent) incurred a fraud in 2020, and slightly over half of those organizations (52 percent) reported frauds are increasing in frequency
• While Consumer Goods and Wholesale/Distributors incurred two-thirds of all credit and AR fraud events, no industry appears immune. Smaller firms under $250 million in sales are as likely to encounter fraud as much as large organizations with over $1 billion in revenue. Fraud losses, however, which in our sample range up to $450,000, tended to increase commensurate with the size of the enterprise.
• The top three fraud controls companies employ to prevent credit employee fraud are segregation of duties (90%), bank account controls (81%), and cross training (64%). Most companies (76 percent) also perform background checks on new employees, but only a minority do so for Temporary Workers (32 percent) and Outside Contractors (25%).
• A significant number of firms (42 percent) do not keep an audit trail of customer master file changes, while nearly two-thirds have 2 or fewer controls in place to ensure proper customer master file management
• Nearly half of the firms in our sample reported it had been over a year since they had updated either their fraud policies and that ratio rises to over two-thirds of firms with revenue under $250 million.
• Less than 1 out of 5 firms are looking to increase spending in 2021 for combatting fraud, but at the same time, nobody is expecting budget cuts. However, firms with revenue under $1 billion were found to be about twice as likely to increase spending than larger firms
• Perceptions regarding organizational fraud efforts were slightly negative giving the impression that people believe that significantly more could be done to combat fraud

Fraud Impact

Observations:

• Roughly 6 out of 10 credit organizations (58.5 percent) incurred a fraud in 2020.
• Slightly over half of those experiencing fraud (52.6 percent) reported that frauds are increasing in frequency compared to only 3 percent who said fraud issues were decreasing.

How many instances of fraud -- attempts as well as actual frauds -- has your credit team encountered over the past twelve months?

Metrics:

Observations:

• Consumer Goods companies and Wholesale/Distribution firms report the greatest incidence of fraud – together they incur over three-fourths of all credit and AR frauds
• Fraud is also a significant issue for Industrial Products companies, firms in the Construction/Building Trades industry segment and firms delivering Business Services.
• Transportation industry accounts for only 0.4% of the total number of frauds. No instances of fraud were reported by Media companies, but because of the limited number of those types of firms in the survey, no conclusions can be drawn regarding the impact of fraud on those industry sectors.
• The incidence of fraud was unaffected by company revenue: firms with less than $250 million in sales were as likely to incur fraud as enterprises with over $1 billion in sales

What is the approximate dollar amount of the fraud losses your credit organization has sustained in the past 12 months?

Metrics:

Observations:

• It's no surprise that fraud losses tend to increase commensurate with the size of the enterprise.
• We had insufficient data to determine if there was a correlation between fraud losses and industry type.

Observations:

• While there has been some increase in frauds related to Covid-19, it is not an across-the-board phenomenon
• The impact, in terms of fraud resulting from Covid-19, is not specific to any industry segment

Fraud Controls

Observations:

• The Controls referenced in the option other category include:
  • Dual Controls
  • Centralized Decision Making at HQ
  • Employee Rotation
• Breaking the responses out by annual revenue did not materially change the ranking
• There appears to be some variation based on industry type. However, we only had sufficient data about Consumer Goods and Wholesale/Distribution companies to provide a statistically reliable breakdown as reflected in the following chart:

Observations:

• Most companies (76 percent) perform background checks on new employees, but only a minority do so for Temporary Workers (32 percent) and Outside Contractors (25 percent)
• Smaller firms (under $250 million in sales) were much more likely (38 percent) to forego background checks on new employees

Observations:

• A significant 42 percent do not keep an audit trail of customer master file changes.
• Moreover, nearly two-thirds employ 2 or fewer controls in terms of customer master file management
• Other controls used include:
  • Annual files review and update
  • Change information must be in writing
  • Confirm with sales or scheduling in-house
  • Confirm customer account changes with the sales rep
  • Delegation of Authority for changes
  • Limited number of employees that can change the data
  • Multiple controls
  • Only certain customer master data fields are allowed to be accessed
  • Only certain individuals have change authorization
  • Passwords changed every 90 days
  • Strong IT security

Observations:

• Nearly half of the firms in our sample reported that they had not updated their fraud policies for over a year.
• Over two-thirds of firms with revenue under $250 million had not updated fraud policies or procedures in the past year.
• In contrast, just one in five firms with revenue over $1 billion had not updated policies or procedures -- the mid-sized firms were under the average at 25 percent for policies and 33 percent for procedures.
• The least up-to-date were Wholesale/Distribution firms -- 56 percent had not updated their fraud policies and procedures in the past year despite being one of the most impacted industry sectors.

Observations:

• Less than 1 out of 5 firms are looking to increase spending in 2021 for combatting fraud, but at the same time, nobody is expecting budget cuts.
• Firms with revenue under $1 billion are about twice as likely to increase spending than larger firms.

Observations:

• The responses as a whole tended towards the disagree- side of the equation, the exception being mid-sized firms, which were right at the neutral mark (3). As such, the general perception is far from being positive in terms of organizational fraud efforts.
• Interestingly, the biggest variance was for the largest firms. It gives an impression that those working at these firms were disappointed in the organizations' efforts in handling frauds.
• The Consumer Goods sector averaged 2.9 on each of the 5 questions, which is slightly positive, while Wholesalers/ Distributors averaged near 3.55, about the same as for the largest firms.