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.

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 fraudweek.com

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