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Fraud Refresher: Four Tips to Boost Fraud Detection

November 16, 2010

This is a guest post by Adrian Sierra

Regardless of the country, fraud and corruption infiltrates every type of business and industry. However, certain countries have higher levels of fraud and corruption than others.

According to the Association of Certified Fraud Examiner’s (ACFE), the world’s largest anti-fraud organization, 2010 Global Fraud Study:

  • The typical organization loses 5% of its annual revenue to fraud.  Applied to the estimated 2009 Gross World Product, the figure translates to a potential total loss to fraud of more than 2.9 trillion dollars.
  • The frauds lasted a median of 18 months before being detected and averaged at least 1 million dollars.
  • Asset misappropriation schemes were the most common forms of fraud, and
  • Small organizations are disproportionately victimized as they typically lack the anti-fraud controls compared to their larger counterparts.

The initial detection of occupation frauds (asset misappropriation, corruption, and financial statement fraud) are through tips.  These tips mostly come from employees but also from vendors, customers, and competitors.

To give you a better glimpse on the reach of corruption, The Transparency International’s (TI), which is a global coalition against corruption, produces a yearly corruption perception index that measures the perceived levels of public sector corruption around the world.  Below is the 2010 Corruption Perception Index.

Most companies have dramatically increased their mitigation of fraud and corruption by

  • Integrating fraud investigation techniques and methodologies into their audit programs,
  • Implementing specific compliance programs such as to address  the Foreign Corrupt Practice Act (FCPA),
  • Building an internal anti-fraud and anti-corruption team, and
  • Supplementing their internal efforts with an external forensic accounting professional.

For companies that are still moving in the right direction, there are a few small steps that will help mitigate, although you can never eliminate, the risk of fraud and corruption.

  • Build the right relationships: Take more time to meet and mingle with the data entry and lower level individuals.   Although sometimes seen as data crunchers, these individuals have a wealth of information.  I can’t count the times I have discusses the basic processes and procedures to discover that they were unknowingly committing fraud at the direction of their superiors.
  • Test the hotline: Even though a company may have implemented a whistle blower hotline, your field visit is an ideal time to not only reinforce the importance and use of the hotline to the local employees but to also test that it actually works.   Yes, I know what you’re thinking.  The hotline was implemented by a reputable organization and it should work.  However, I have tested multiple hotlines during field visits and found that sometimes the hotline number is difficult to access or the message did not have a local language option.  The hotline should be very easy to access and user-friendly.
  • Trust your instincts: Where there is smoke there may be fire.  While reviewing items you may come across an unrelated transaction or a comment made by fellow employee.  Because we don’t have the time to analyze every transaction, it is up to you to effectively determine which ones stay on your radar.   To help with a flood of information, I traditionally create and priorities a Potential Risk Item List which also helps in connecting some of the jigsaw puzzle pieces.
  • Fraud Training: You should take advantage of multiple and sometimes free training opportunities from various external organizations such as the Association of Certified Fraud Examiners (ACFE), the American Institute of Certified Public Accountants (AICPA), and the Institute of Internal Auditors (IIA) as well as complementary in-house presentations from forensic accounting professionals.
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