Due to the troubling lack of data on professional athletes’ finances, BrightLights looked for a parallel data set that could help
to define quantitative estimates for fraud in professional athletes.
BrightLights reviewed a study of 2,410 cases of occupational fraud and abuse in corporations that provided a reasonable parallel to pro athletes.
The study found:
Where's the Data?
As BrightLights was starting out, I was trying to gather financial data on professional athletes to understand what happened to athlete’s money after they were paid. How much of their earnings did athletes save? How much did athletes spend? What did they spend their money on? How much did athletes invest in financial products and real estate? How much of their money was invested in private companies? Who was investing their money? Who was managing their money? Who introduced athletes to these individuals? What percentage was everyone being compensated? And on and on.
I watched documentaries and read tons of articles on athletes being scammed, defrauded, going bankrupt, and the infamous Sports Illustrated story by Pablo Torre that stated 60% of NBA players were broke after five years and 78% of NFL player were broke after two.
I was hoping to gather financial data to piece the puzzle as to why these types of financial statistics and disasters appeared to happen too frequently - where and why did it all start?
There was very little data and information anywhere on athletes’ finances that could help me answer these questions and quantify the problem (outside of Torre’s article - although he didn’t provide the source data used to come to the percentages published).
The four major sports - NFL, NBA, NHL, and MLB - have published very little information or studies on their athletes finances, and the two1 studies2 I did find had pretty glaring weaknesses.
My assumption is these organizations rarely, if ever, publish studies because the data is damning, and it would turn into a public relations nightmare. Why else would there be so little out there? Torre himself called studies in athletes’ finances a “depressingly brief roll call of academic research in this field.”
Find Another Way
Since there was little quantitative information on athletes to be found, I looked for similar data that I could apply to athletes. During my studies to become a Certified Fraud Examiner, I knew that the Association of Certified Fraud Examiners (“ACFE”) conducted a vast study on fraud every two years.
In 2016, the ACFE’s Report to the Nations on Occupational Fraud and Abuse3 detailed a study of 2,410 cases of occupational fraud in corporations.
Occupational fraud is defined as:
The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.
If you look back into all of the frauds and scams I cited earlier in this post, these occurred because fraudsters used the athlete’s occupation for their personal enrichment by misusing the athlete’s assets. Therefore, fraud against athletes comparatively equates to occupational fraud.
Now you might say: The study is on occupational fraud in corporations not athletes so where’s the parallel?
It's a Corporate World
A corporation has a lot of similarities to professional athletes. Corporations are revenue-driven businesses that have individuals/departments responsible for different duties. Corporations have most of the rights and responsibilities that an individual possesses, including the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. All of these traits, with the possible exception of hiring employees, are shared by professional athletes. Therefore, athletes comparatively equate to corporations.
This study by the ACFE on occupational fraud in corporations is the closest comparison and case study that I can use to help quantify what problems may be occurring in the finances of athletes. Obviously, we have to take the results with a grain of salt because no comparison like this will be perfect, but it’s a start.
I. 5% of revenue is estimated to be lost in a given year as a result of fraud (Page 8).
What's the biggest difference between corporations and athletes? Athletes do not have a compliance department - a department dedicated to identifying fraud. If this 5% estimate of annual revenue lost is for corporations that have checks and balances to monitor activity for fraud and shady business practices, what do you think the percentage is for athletes without these checks and balances?
II. 88% of fraudsters are first-time offenders (Page 66); and
III. 94% of fraudsters took some effort to conceal their fraud (Page 19).
Individuals commit fraud for three main reasons (referred to as "The Fraud Triangle"):
- Pressure - Fraudster has a problem that money can solve.
- Opportunity - Fraudster sees how he can abuse his position of trust with a low perceived risk of getting caught.
- Rationalization - Fraudster can justify what he is doing.
The pressure and rationalization of a fraudster is something you may never know until it’s too late. Couple that with the fact that many athletes do not have the proper controls in place to identify fraud, then the fraudster has an opportunity too.
IV. Individuals stealing money or other assets accounted for 83% of frauds (Page 12).
Asset misappropriation - primarily stealing money from bank and investment accounts - was by far the most common form of occupational fraud, occurring in more than 83% of cases.
One of BrightLights' main services - Banking Review - primarily aims at identifying asset misappropriation.
V. The longer a fraud lasted, the greater the financial damage it caused. (Page 17)
While the average duration of the frauds in the ACFE study was 18 months, the losses rose as the duration increased.
VI. The presence of compliance and anti-fraud controls was correlated with lower fraud losses and quicker detection. (Page 43)
It’s clear that the faster a fraud is identified, the less damage it will cause.
Click here to read my follow-up blog post which details how this all affects professional athletes from a dollar standpoint.
Where Do We Go From Here?
Fraud is a risk that will always be present in an athlete’s life if he has others managing his investments and money. Occupational fraud and other abusive practices are risks not only for corporations but also for athletes who do not actively review their own finances.
Contact BrightLights for your free consultation.
1 - The NFL conducted one study right after Torre’s article that focused on NFL athletes who played in the NFL for at least three years (thereby eliminating a large segment of the population who did not play three years). The study provided a much brighter picture about NFL retirees finances; however, the proper demographic of NFL retirees was not studied. Only 19% (Page 10 of the study) of retirees age 26 - 44 were interviewed, and within that demographic, only 19 NFL retirees age 25 - 29 were interviewed yet those retirees age 25 - 29 did not even appear to be included in the results on Pages 14 - 37 or part of the definition of "younger retirees" (defined on Page 1 as age 30 - 49).
With all due respect to the older retirees (age 45 - 90+) studied, they were not making millions in their day and therefore much smaller targets of fraud (what was there to steal?). Additionally, an education was basically required for older athletes (the study states "college graduation rates are higher for older NFL retirees") because the professional life at that time was not a lucrative or long-term job. It was for the love of the game. For this study to only reach 19% of the population that fraud and financial abuse was a much higher risk seems to punt the real problem.
Nonetheless, the study did find some alarming results. Page 6 of the study stated that nearly half of all the 1,063 NFL retirees interviewed had experienced significant losses in businesses or financial investments. 50% of younger retirees (age 30 - 49) also stated they had been given bad financial advice. More troubling, the study stated 10% of younger retirees were found to have incomes two times below the poverty level (the amount of the federal poverty level is based on the number of persons in your household).
2 - Another study - that was not peer-reviewed - done by the National Bureau of Economic Research (NBER) painted a different picture from Torre’s assertions. Torre himself pointed out problems with the data used in the study and the conclusions made, namely that the study only focused on bankruptcies, thereby severely limiting its scope because no pro athlete wants to deal with the public humiliation of being on Deadspin or BuzzFeed with the front page headline blaring, “Joe Athlete BANKRUPT!!” Torre also stated the NFL or NFLPA has never publicly disputed his figures.
3 - Disclosure: I am a Certified Fraud Examiner but get no compensation from them.