Fraud Week 2020: Fraud Runs Amok

By Lowers & Associates,

Fraud Runs Amok: Where Are the Whistleblowers and Auditors Today? Sergio P. Negreira, CPA, CFF, JD EVP, Latin America & Global Forensics Services Lowers Forensics International

Where Are the Whistleblowers and Auditors?

Today, we continue our special 5-part Fraud Week Coffee Break Series where we invite you to spend time each day learning about various aspects of fraud detection and prevention through the eyes of our Certified Fraud Examiners and other fraud experts.

Fraud Week is an annual movement, organized by the Association for Certified Fraud Examiners (ACFE), to champion the need to proactively fight fraud and help safeguard businesses and investments from the growing fraud problem.

In its 2020 Report to the Nations on Occupational Fraud, the ACFE looked at how fraud is detected. As it turns out, 43% of occupational fraud is detected by tips. The next most common way is 15% by internal audit. These statistics underscore the vital role of whistleblowers and the need for organizations to provide programs that enable employees and others to be able to safely report suspicious activity.


Fraud Detection

Whether by whistleblowers or other methods, fraud detection is a concept organizations need to understand in order to limit the losses they suffer at the hands of fraud. The faster organizations can detect fraud, the smaller the size of the loss. According to the ACFE, “It is also key to fraud prevention because organizations can take steps to improve how they detect fraud, which in turn increases the staff’s perception that fraud will be detected and might help deter future misconduct.”

As mentioned, by a large margin, tips from whistleblowers are the most common way occupational frauds are uncovered. This fact underscores the importance of cultivating and thoroughly evaluating tips that come in through your whistleblower program.

Here’s what the data reveals about fraud detection methods:

How is occupational fraud initially detected?
Source: ACFE 2020 Report to the Nations


How COVID-19 is Impacting Whistleblowers and Auditors

Preventing, detecting, and investigating fraud is more difficult during the COVID-19 pandemic. In fact, according to the ACFE’s COVID-19 Benchmarking Report, “An inability to travel is still the most significant challenge in combating fraud right now, but more people are citing conducting remote interviews as a current top challenge.”

In COVID, since a lot of people are still working remotely, a lot of employees can’t observe other employees’ habits and what they’re doing. And in general, investigating during COVID is very difficult because companies aren’t open and travel is more difficult.

Despite the challenges, organizations are wise to continue to support whistleblower programs and maintain their focus on fraud detection and investigations during the pandemic where the pressure, opportunity, and incentive for fraud is very high.

We hope you enjoyed this Coffee Break article. Come back tomorrow to hear from Carlos Rivera, CFE, MAFF, Senior Vice President – Caribbean & Latin America of Lowers Forensics International and Grant Mizel, Financial Analyst, Emerging Markets of Lowers Risk Group. Rivera and Mizel will speak about situational awareness and the Fraud Triangle during COVID-19.

7 Must-Haves for Occupational Fraud Prevention

By Lowers & Associates,

7 Must-Haves for Occupational Fraud Prevention

As the ACFE’s 2019 Fraud Awareness Week comes to a close, it’s a good time to create your plan for fraud prevention in the year ahead. These seven fraud prevention strategies, drawn from the 2018 Report to the Nations by the Association of Certified Fraud Examiners (ACFE), will go a long way in fortifying your organization against the conditions that can facilitate occupational fraud at the workplace.

1. Tone from the Top

A robust anti-fraud program that is embraced from the top of the organization to the bottom creates a culture of honesty and fairness. A solid program starts with a code of ethics, signed by all employees, and continues with anti-fraud policies, training, internal controls, and periodic employee surveys which help gauge the extent to which employees believe management acts with honesty and integrity. Many organizations also include fraud prevention objectives as a part of their employee performance goals.

2. Anti-fraud Training

Practical, hands-on training that educates employees on how to detect fraud, what to look for, how internal controls work, and how to report fraud are instrumental to any anti-fraud program. For instance, make employees aware of the research that demonstrates how fraudsters attempt to conceal their activities, such as through the creation of fraudulent documents, altered accounting transactions, or fraudulent journal entries.

3. Clear Reporting Methods

Fifty-three percent of fraud cases in the ACFE’s 2018 Report to the Nations were reported by employees, and the research also revealed that hotlines were effective in encouraging such reporting. So, whether you create a dedicated fraud hotline, or rely on emails, web forms or in-person reporting, do be sure that all employees know their options for reporting suspected fraud.

4. Proactive Detection

Commit to having anti-fraud efforts remain at the forefront of your organization. This means sending out regular messages to the team, conducting surprise audits, performing regular account reconciliation, and implementing continuous monitoring software to detect anomalies. Organizations with proactive detection methods like these caught fraudulent activities months earlier than those with passive detection. For example, frauds detected actively by IT controls tended to last five months and cause a median loss of $39,000, compared to schemes detected passively (e.g., through notification from law enforcement), which tended to last two years and cause a median loss of almost $1,000,000. If you’re not sure where to start, begin with a fraud risk assessment to identify and mitigate any vulnerabilities you find.

5. A Strong Auditing Team & Internal Controls

The one-two punch of a strong auditing team and solid internal controls will mean the difference between sleeping well at night or potentially having massive losses. Your auditing team should have adequate resources and authority to operate effectively and without undue influence from senior management. In addition, the ACFE’s 2018 study found that weaknesses in internal controls were responsible for nearly 50 percent of all fraud cases! Anti-fraud controls are paramount to preventing or detecting fraud. Here are a few of the most important controls:

  • External audits of financial statements
  • Internal audit department
  • Management certification of financial statements
  • External audit of internal controls over financial reporting
  • Management review
  • Reporting hotline
  • Code of ethics and anti-fraud policy
  • Proper separation of duties
  • Job rotations

6. Diligent Hiring Practices

Background checks should always be a part of any hiring practice, and attention to criminal history, credit reports, and reference checks are particularly important in the context of preventing fraud. However, since 96 percent of fraud perpetrators in the AFCE study had no prior fraud conviction, the next step is understanding the behavioral red flags associated with fraudsters. Eighty-five percent of perpetrators displayed at least one of these red flags: living beyond means; financial difficulties; unusually close relationship with vendor/customer; control issues, unwillingness to share duties; divorce/family problems; and a “wheeler-dealer” attitude.

7. Employee Support Programs

Employee support programs are valuable for a variety of reasons, but in the context of occupational fraud, they can help address some of the underlying issues that present themselves as “red flag behaviors.” An open-door policy that welcomes employees to speak freely about financial, family or addiction pressures can help alleviate them before they become acute or lead to destructive behaviors.

The most cost-effective way to limit fraud losses is, of course, to prevent fraud from occurring. With these strategies in-hand, your organization will be off to a strong start. If you’d like an experienced team to help create an anti-fraud program or investigate suspected fraud, please reach out at any time.

The ACFE’s 5 Big Fraud Tips You Should Act on Now

By Lowers & Associates,

The ACFE’s 5 Big Fraud Tips You Should Act on Now

As part of the 2019 International Fraud Awareness Week, the Association of Certified Fraud Examiners (ACFE) distributes information and training to help anti-fraud professionals reduce the incidence of fraud and white-collar crime. A recent ACFE publication, 5 Fraud Tips Every Business Leader Should Act On, spells out five ways organizations can work to prevent and minimize fraud in the workplace. We’ve paired their recommendations with the research-based actions you can take to achieve these aims.

1. Be Proactive

A code of ethics for management and employees sets the tone that your organization is committed to conducting business honestly and fairly. Fortify your commitment with internal controls around areas of the business that are vulnerable to fraud.

In its 2018 Report to the Nations, the ACFE studied nearly 3,000 incidents of fraud across 125 nations. Here are the top 10 most common anti-fraud controls they found among the organizations in the study:

  1. Code of conduct: 80%
  2. External audit of financial statements: 80%
  3. Internal audit department: 73%
  4. Management certification of financial statements: 72%
  5. External audit of internal controls over financial reporting: 67%
  6. Management review: 66%
  7. Hotline: 63%
  8. Independent audit committee: 61%
  9. Employee support programs: 54%
  10. Anti-fraud policy: 54%

The study found that weaknesses in internal controls were responsible for nearly 50 percent of all fraud cases.

2. Establish Hiring Procedures

Background checks will continue to be one of the best practices any workplace can implement, yet surprisingly, a full 96 percent of fraud perpetrators had no prior fraud conviction, according to the AFCE’s 2018 report. Therefore, understanding the behavioral red flags displayed by fraud perpetrators can help organizations detect fraud and mitigate losses. The AFCE found that 85 percent of fraudsters displayed at least one of the six red flags listed below and 50 percent of them exhibited multiple red flags.

Six Red Flags of Fraud:

  1. Living beyond means
  2. Financial difficulties
  3. An unusually close relationship with vendor/customer
  4. Control issues, unwillingness to share duties
  5. Divorce/family problems
  6. “Wheeler-dealer” attitude

3. Train Employees in Fraud Prevention

Looking for signs of fraud isn’t top of mind for most employees, but having a code of ethics and internal controls create a strong workplace culture that’s attuned to the possibility of fraudulent activity. Employers can take this awareness a step further by educating employees on how to recognize fraud in their day-to-day lives.

Here are the top eight concealment strategies used by fraudsters:

  1. Created fraudulent documents: 55%
  2. Altered physical documents: 48%
  3. Created fraudulent transactions in the accounting system: 42%
  4. Altered transactions in the accounting system: 34%
  5. Altered electronic documents or files: 31%
  6. Destroyed physical documents: 30%
  7. Created fraudulent electronic documents or files: 29%
  8. Created fraudulent journal entries: 27%

4. Implement a Fraud Hotline

Now that employees know some of the signs to look for, employers should also provide a clear means for reporting suspected fraud. The top three ways that fraud is detected are through tips (40%), internal audits (15%), and management review (13%).

Employees are responsible for reporting 53 percent of occupational fraud cases with the remaining coming from outside parties, such as customers, vendors, or shareholders.

Having a fraud hotline has proved to be instrumental in detecting fraud. In fact, 46 percent of cases detected by tips in the AFCE’s study had hotlines versus 30 percent coming from tips where no hotline existed.

5. Increase the Perception of Detection

Keeping the risk of fraud both top of mind and at the forefront of your organizational policies and practices is key to preventing, recognizing, and mitigating its impacts. In addition to having employees sign a code of conduct, make sure you’re regularly communicating to staff about anti-fraud policies. Remind them of the methods available to report suspicions of misconduct and the potential consequences (including termination and prosecution) of fraudulent behavior.

Though 42 percent of the organizations in the 2018 Report to the Nation offered hotlines to report fraud tips, other mechanisms are also readily available. They include:

  • Email: 26%
  • Webform/online: 23%
  • Mailed letter: 16%
  • Other: 9%
  • Fax: 1%

To learn more about helping your organization combat fraud, stay tuned here for the rest of our our 2019 Fraud Week Series. If you need help formulating your fraud prevention program, request a meeting with a risk management expert at Lowers & Associates.

2019 Fraud Week Series: How Technology is Helping in the Fight Against Fraud

By Lowers & Associates,

2019 Fraud Week Series: How Technology is Helping in the Fight Against Fraud

This week is the 2019 International Fraud Awareness Week, an initiative of the Association of Certified Fraud Examiners (ACFE) to encourage business leaders and employees to prevent and minimize the impact of fraud in the workplace.

Occupational fraud, that is fraud committed by employees against employers, resulted in $7 billion in losses in 2017, according to the ACFE’s 2018 Report to the Nations. In studying nearly 3,000 incidents of fraud across 125 nations, they found cases ranging from computer theft to check tampering to corruption. Individual losses varied, with 55% of losses being $200,000 or less and 22% of cases being $1 million or more.

Through educational videos, workplace training, and awareness efforts, Fraud Awareness Week aims to arm workplaces with technologies and resources to prevent, identify, and effectively address these types of fraudulent activities.

A Snapshot of Occupational Fraud

Types of Fraud: Fraudulent activities fall into one of three categories: asset misappropriation; corruption; and financial statement fraud. Representing 89 percent of cases, asset misappropriation (e.g., altering checks or payments, misusing organizational resources) are the most common, with a median per-loss cost of $114,000, according to the report. Financial statement fraud, however, while more infrequent, led to much greater median losses at $800,000 per event.

Fraudster Profiles: Surprisingly, a full 96 percent of fraud perpetrators had no prior fraud conviction, according to the AFCE’s 2018 report. This underscores the fact that organizations need to have effective fraud detection methods in place to continuously protect the organization. This is particularly relevant considering fraudsters who were employed for more than five years stole twice as much, $200,000 vs $100,000 for newer employees.

Underlying Causes: Internal security measures are valuable lines of fraud defense for companies, yet nearly half of companies in the study cited “insufficient fraud controls” (30%) or “weak systems” (19%) as the underlying reason that fraud was made possible.

Impact: No organization is immune to occupational fraud. In fact, small businesses, defined as those with less than 100 employees, experienced a median loss of $200,000, compared to their larger counterparts of 100 or more employees, who experienced a median loss of just $114,000. It makes sense when you consider that small businesses have fewer resources to invest in internal controls and generally put more trust in their employees due to their inability to implement robust anti-fraud strategies.

Reporting Sources: Early detection is key to limiting losses associated with occupational fraud, and the ACFE study found that 40% of fraud detection came from tips. Of those tips, 53% were received internally and 32% from outside sources. Reporting hotlines go hand-in-hand with tips as an effective way to detect fraud. Of the companies analyzed in ACFE’s 2018 report, those with an accessible hotline detected fraud cases 46% of the time compared to a 30% success rate for companies without hotlines. The second highest fraud detection source at 15% was through an internal audit.

Using Technology to Detect Fraud

The key to catching fraudulent actions before real damage is done is having systems in place to ferret out anomalies and report suspicious activities early. This means being equipped with tools like automatic monitoring, artificial intelligence, and anomaly detection protocols. For instance, surprise audits and data monitoring are a powerful combination in reducing fraud loss. Though only 37% of the companies examined in the ACFE  study used them, those that did got fraud cases under control in approximately half the time and reduced fraud losses by more than 50%.

In its latest infographic, How is Technology Being Used to Detect Fraud, the ACFE highlights some of the technologies that organizations are using to proactively identify suspicious activities. Here is a sampling:

  • 26% of organizations currently use biometrics as part of their anti-fraud programs, and another 16% expect to deploy biometrics over the next two years.
  • Purchasing is the risk area where organizations most commonly use data analytics (41%) to monitor for potential fraud.
  • Nearly two-thirds of organizations currently use exception reporting or anomaly detection techniques in their fraud-related initiatives.

View the ACFE Infographic at

To learn more ways to help your organization combat fraud, continue to look for our Fraud Week content and visit the ACFE Resources page.