Your Best Ways to Detect Fraud

Posted by Amanda Nieweler

on February 23, 2016


Your Best Ways to Detect FraudHere’s a few of the best ways to detect fraud in your organization

According to the ACFE, globally organizations lose about 5% of their revenues to fraud. These numbers are quite staggering. And when you really drill down into the matter, it’s employees who are participating in this cost.

Some businesses are able to continue operating despite the losses. Others will inevitably shut their doors because they can’t keep up.

However the cost to fight fraud isn’t all that much when you compare it to a 5% loss in revenue year after year.

Fortunately, there are cost-effective strategies that businesses large and small can take to detect fraud, reduce vulnerability, and stem losses. Here’s what you need to know:

Tips Work
Tips are always the best way to detect fraud and abuse, according to the ACFE. In their Report to the Nations, they found that more than 40% of all reported fraud cases were uncovered by an employee tip — more than twice the rate of any other detection method. Coming in second and third were management review (16 percent) and internal audit (14 percent). Would you rather not allow your employees to speak up while losing to fraud? Or would you rather count your lucky stars that you have a culture that lets employees speak up and save a bunch of money?

Hotlines Work
Organizations with anonymous reporting hotlines are more likely to catch fraud via a tip. Think of it this way – if 40% of fraud is uncovered by a tip, then it makes sense that losses are decreased by 40%. Also, fraud is discovered 50% more quickly when businesses have a hotline. If employees account for nearly half of all tips, then the remaining half are from outside the organization. So it’s important to advertising your hotline and whistleblower policy with vendors, customers, and shareholders.

External Audits Shouldn’t Be Primary
Many organizations routinely rely on external audits to prevent and detect occupational fraud, and other data anomalies. However, the ACFE’s study found that although important, these audits are not very effective at being a primary anti-fraud mechanism. External audits are the primary detection method in just 3 percent of all the cases reported — even less than the 7 percent of cases detected by accident – according to their report.

Criminals Work Together
Many criminals work together and therefore, can be more effective at evading anti-fraud controls. They also steal larger amounts of money from the organization. A fraud committed by a single person averages about $80,000, according to the ACFE report. But when criminals work together, the average jumps to $200,000 and higher. The more people invited to the party, the greater the damage.

Not All Frauds Are The Same
Frauds vary in size and make-up. But they can all be classified into one of three categories – asset misappropriation, corruption, and financial statement fraud. The most common of these occupational frauds is asset misappropriation, which occurred in 85% of the cases in the ACFE study. This type of fraud does have the least financial impact, however, it can still force any company to close its doors for good.

Different Size Businesses, Different Frauds
Size of business does equal the type of fraud happening. Smaller businesses are more likely to fall victim to check tampering, payroll and cash larceny. Larger organizations will see corruption as a more significant problem. Smaller businesses to have less resources to devote to fraud prevention, however there are many fraud prevention controls that won’t break the bank and are very effective. These include creating an anti-fraud policy, establishing formal management review procedures, and providing anti-fraud training for all staff members.

Be Proactive
It’s important that businesses actively seek out fraudulent activity rather than taking more passive approaches and let the damages grow. If your business can afford the software and programs that are used for everyday jobs – accounting, marketing, sales, etc. – then that business can afford the very small cost to implement a third-party hotline and ethics reporting system that won’t break the bank. Contact us today to see for yourself.