10 Fraud Detection Methods That Will Make You a Hero!
Who Doesn’t Love Being a Hero!
No organization wants to wake up to find itself suddenly the center of unexpected liability or unwelcome scrutiny. That vulnerability is more significant with the increase of occupational fraud stimulated by today’s tough economy, and your resources are stretched thin.
Fraud costs everyone more if it’s ignored, and your organization is not immune from it, no matter what you might think. The ACFE’s Report to the Nations on Occupational Fraud and Abuse (yes you’ve probably already seen and read it but it’s worth repeating over again) states that from their study, the median loss caused by fraud was $145,000 – if you’re a small business, that could spell disaster. 22% of the cases in the study reported fraud loss of at least $1 million.
Globally…well occupational fraud and abuse is a universal problem. Fraud does not discriminate. Any organization, anywhere, anytime.
Here’s a quick list of ways to improve your fraud detection – because it’s not going away. So let’s be proactive shall we?
Use a Hotline:
By far, tips are consistently the most common fraud detection technique. The numbers are high – over 40% of all cases in the ACFE report, were detected by a whistleblower tip. This is more than twice the rate of any other detection method. And employees accounted for nearly half of all tips that led to the discovery of fraud.
Multiple Reporting Mechanisms:
Offer multiple reporting mechanisms. Your employees aren’t the only people with eyes and ears on your organization. Fraud can be observed by contractors, vendors, customers, and members of the public. If your fraud tipsters can access your tip line via phone, email, mail, fax, and web, all parties have different options open to them and they’ll be more inclined to choose their method and make their report.
Outsource “Third-Party” Hotline:
Internal systems often sit behind firewalls. If you have an internally run system, there’s a good chance your employees, who would prefer to use your system from home, can’t because they can’t access it. An external third-party hotline increases accessibility to anyone who needs to use it.
Training Your Employees:
Train all your employees on what fraud is, what to look out for, and how to report it. Frauds will differ from industry to industry. If you’re in the healthcare industry, then you need to look out for false billing of services, or incorrect diagnoses reporting. If you’re in the financial industry, you’ll need to look out for mortgage or securities frauds. If you have a tip hotline, your employees need to know about it and how to use it.
Well if you’re anything like me, a little repetition doesn’t hurt (especially when it came to grade 10 math!…and I still don’t get it). Train your employees every year or twice a year, on how and where they can report on any behaviours they think are questionable, and may go against your corporate ethics and culture. – you can never train enough – every opportunity to educate staff on fraud and unethical behaviour is helpful
Smaller businesses probably have petty cash funds and other cash assets within the office. Put processes in place for handling these – require receipts for everything. Reconcile your petty cash fund before replenishing it. As well, most organizations require employees to have use of company credit cards. It can be very tempting to misuse these. For example, if you are a manufacturer of a food product, you probably have delivery drivers eating up miles on the road to make their deliveries. The organization will issue credit cards – for use on truck gas, lodging, food, when on the road – that could easily be used for personal vehicle gas-ups, etc. Get receipts for every transaction and compare with on-road schedules.
Most occupational fraudsters exhibit certain behavioural traits that can be warning signs of their crimes. They may be living beyond their means, suddenly owning new houses or cars. Also, they may have more than unusual close associations with vendors or customers. According to the ACFE’s Report, in 92% of the cases, at least one common behavioural red flag was detected.
Internally in your organization, you can help reduce the opportunity for occupational fraud. Sure it’s hard today, with a seemingly shrinking workforce, and more work to be done. But if possible with sensitive duties or tasks, try to segregate these between more than one employee. Put internal controls in place to regularly track or audit these sensitive duties. But most important, develop a culture and environment of integrity. An employee is less likely to commit a fraud if they feel like they are a contributing member of the organization, and if management also exhibits actions of integrity and trust.
Ack, like pop quizzes (the bane of my high school existence). But these are good. By implementing a spot audit program and conducting random audits on particular areas where fraud could occur, you can keep ahead of any possible threat, and if you do find any concerns, you can immediately conduct whatever investigation you need to rectify any issues.
Having a policy, then filing it away, isn’t enough. Your policies need to be kept fresh, updated on occasion, and available organization-wide. These policies will instruct how to manage conduct, ethics and expected behaviour. Important – it has to be actioned from the top down! As well, your policy should cover where and how your employees can report on any concerns they have, and what they can expect as follow-up action when and if they do so.
Fraud can be preventable. You just need to do something about it. Incorporate a strong compliance program that includes an ethics reporting system. And empower your employees to speak up when they see wrongdoing.