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in U.S. organizations. Nevertheless, even at a rate of 5 percent, this estimate of the cost of fraud is astounding. If multiplied by the U.S. Gross Domestic Product—which, for 2006, is projected to be $13.037 trillion53—then the total cost to organizations in the United States exceeds $650 billion annually. It is a staggering sum, nearly one and a half times what was budgeted for national defense in 2006. It is more than we spend on edu- cation and roads, not to mention 32 times what the federal government budgeted to fight crime in 2006.

But what does the figure really mean? It is simply the collective opinions of those who work in the antifraud field. Unfortunately, finding the actual cost of fraud may not be possible by any method. One obvious approach would be to take a scientific poll of the workforce and ask them the tough questions: Have you stolen or committed fraud against your organization? If so, how? And how much was the value of the fraud or abuse you committed? But the unlikelihood of people answering such questions can- didly would make any results obtained by this method unreliable at best.

Another approach to finding the cost of fraud would be to do a scientific poll of a rep- resentative sample of organizations. Even assuming the respondents answered the poll correctly, there would still be an obvious flaw in the data: Organizations typically don’t know when they are being victimized. And of course, there is the definitional issue that plagues all the methods: Where do we draw the line on what constitutes occupational fraud and abuse? So asking the experts—the approach used here—may be as reliable as anything else. But the reader must be cautioned that, by any method of estimation, the numbers on fraud and abuse are soft and subject to various interpretations.

Whatever the actual costs, organizations are unwittingly paying them already as a part of their total operating expenses. Such is the insidious nature of fraud, and what to do? How can we possibly detect something we don’t know about in the first place? It’s as if a secret “fraud tax” has been levied on organizations. And interestingly, many organiza- tions may silently condone fraud and abuse, which is committed from the top down. In- deed, some sociologists see abuse as an informal employment benefit, and have even suggested that chronic pilferage and certain other abuses might actually have a positive effect on morale and therefore increase productivity.49

Losses Reported in the 2006 National Fraud Survey

As was stated earlier, the 2006 survey yielded 1,134 usable cases of occupational fraud for our study. Among those cases, the median loss experienced by the victim organiza- tions was $159,000. Exhibit 1.5 illustrates the distribution of all losses. Note that nearly one-fourth of the cases in the study (24.4%) caused losses of $1 million or more. Al- though not shown in the chart as a separate category, there were nine cases with reported losses of at least $1 billion.

The Perpetrators of Fraud

By definition, the perpetrators of occupational fraud are employed by the organization they defraud. Participants in the 2006 survey provided information on the perpetrators’


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