Part 4 in a 4 part series: “Fraud, Embezzlement & Thievery: Oh, My!”
You have heard them time and time again… internal controls… segregation of duties… management oversight… mandatory vacation… some key methods to help prevent the occurrence of fraud. Does your implementation of these items mean that your organization is safe?
The easy answer to that question is “NO”! No organization can completely safeguard itself to the occurrence of fraud, but it is your duty to remain proactive, and to educate yourself and your employees as to ways that you can likely detect it quickly if you cannot be sure to prevent it altogether.
For over a decade, the Association of Certified Fraud Examiners has collected data about the detection of fraud schemes, and reported upon the results in their Report to the Nations, as published biennially. From the 2012 Report to the Nations on Occupational Fraud and Abuse, the results show a consistent argument for the most successful methods to detect fraud in today’s organizations. Of the 12 methods presented, the top three combined were the detection method over 72% of the time, with Management Review and Internal Audit being the 2nd and 3rd methods, respectively, each with 14%. The top method, Tips, was by far the most successful initial detection method, coming in with over triple the percentage of any other method, at over 43%.
It is important to note that each of these top methods are highly reliant on information internal to an organization, with a key factor in all being the proactivity of the organization to (1) set a tone at the top that strong controls and ethics are paramount to the organization, (2) design strong internal controls and training programs for all management and employees, (3) be timely in the monitoring of such controls and regulations, and (4) reinforce these principles in a constructive, safe environment.
It may shock you to not see the external audit process as one of these top initial detection methods. External audit was the initial detection method just 3.3% of time, followed by police notification (3%), surveillance (1.9%), and confession (1.5%). This data combined with estimates of monetary loss in surveyed fraud schemes showed that these primarily external methods resulted in longer detection periods, and thus, higher median loss than the aforementioned internal methods of detection.
This serves to reinforce what you have heard time and time again… a strong internal control environment is the key to being a proactive organization in the fight against fraud.