Finding the Fraudster, the Tried and the True

By Anthony W. Rapp, CPA, CFE, CGMA

arapp@maillie.com

Every year the ACFE issues their Report to the Nations and details the methods by which fraud is detected and year after year the same three methods of detection of fraud are the most successful.  The 2018 Report to the Nations is no different, in fact these three methods accounted for 68% of all fraud detections.  While it seems fraudsters are always finding clever new ways to commit fraud, those charged with the detection of fraud have to rely on the same tried and true methods of finding it.  What can we do to keep these methods working and stay ahead of the fraud?

Management review accounts for about thirteen percent of all fraud detection and is the third most common method of detecting fraud. The median loss on a fraud case discovered by management review is about $110,000 and usually lasts about 14 months before it is detected. While this method of detection has been useful in finding fraud, there is room for improvement. Having management review as an integral part of your internal control system can not only lead to more detection, it can reduce the amount of time it takes to detect fraud as well as possibly eliminating some types of fraud if implemented correctly.

The second most common method of detection in the 2018 Report to the Nations is the internal audit function. Fraud detected by internal audit resulted in a median loss of $108,000 and the average fraud lasted about 12 months before detection. Internal audit can be done in-house, or it is a function that can be outsourced. While not all organizations have an internal audit function, the value of having an internal audit can outweigh the costs. Not only has it been shown to detect fraud, there is added value in organizational improvements that can be made in preventing fraud by following internal auditor recommendations for improved internal control.

By far the most common method of detecting fraud is through tips. Tips led to the detection of fraud in forty percent of fraud detection cases. In fact, tips led to more cases of fraud being detected than the next two most common methods combined. The median loss of a case detected by tips is $126,000 and the frauds lasted an average of 18 months. Breaking down the sources of the tips, the Report notes that fifty three percent of the tips used to detect fraud came from employees, while fourteen percent of the tips came from anonymous sources. This demonstrates employees being valuable resources for detecting fraud and that there are people willing to report fraud but want to remain anonymous. Organizations should do what they can to encourage these kinds of tips. One method that can be used is a fraud hotline. This hotline should be set up to allow for the reporting of possible fraud conveniently and anonymously (when legal). The evidence is clear, organizations with hotlines' fraud loss value was fifty percent less than organizations without hotlines and the organizations without hotlines doubled the number of frauds discovered by accident or external audit than those with hotlines. Implementing a hotline can be more cost effective in the long run than hoping that fraud is discovered by accident or waiting for the external audit to find fraud.

These tools, available for the detection of fraud have been shown to be tried and true, and once they are implemented, not only do they help detect fraud but can lead to its prevention. If you are interested in receiving a fraud prevention checklist or speaking with a certified fraud examiner, contact me at arapp@maillie.com.

Sources:

https://s3-us-west-2.amazonaws.com/acfepublic/2018-report-to-the-nations.pdf