The Association of Certified Fraud Examiners’ (ACFE’s) Report to the Nations: 2020 Global Study on Occupational Fraud and Abuse provides ample evidence that some fraud detection methods are better than others. In general, passive methods, such as accidental discovery or notification by police, coincide with longer-running schemes and higher financial costs. To nab dishonest employees quickly and limit losses, your company needs to be proactive.

Shorten time, minimize costs

Active methods include IT controls, data monitoring and analysis, account reconciliation, management review, surprise audits and internal audit. These methods can significantly lower fraud durations and losses.

For example, frauds detected by IT controls had a median duration of six months and a median loss of $80,000. Those found through account reconciliation ran for a median of seven months and totaled a median loss of $81,000. By comparison, fraud detected through notification by police or stumbled upon by accident had a median duration of 24 months. When companies learned about a scheme from law enforcement, the median loss was $900,000.

Surprise audits and proactive data monitoring and analysis can be especially effective ways to fight fraud. On average, victim organizations without these antifraud controls in place reported more than double the fraud losses, and their frauds lasted more than twice as long as frauds at victim organizations with these controls in place. Yet only 37% of the organizations in the ACFE study had implemented surprise audits or data monitoring and analysis.

Tips are most effective

The leading fraud detection method, tips, could be considered active or passive. But there’s no arguing that this method is effective — particularly when organizations offer employees and other stakeholders confidential fraud hotlines. Organizations that had hotlines for reporting misconduct detected fraud by tips more often (49% of cases) than those without hotlines (31% of cases).

To ensure that tips are used as an active detection method, your organization should set up a hotline and promote its use. Increasingly, companies offer other reporting forms, including email and Web-based submissions. Also, the ACFE has found that in 33% of cases where a tip was made, the whistleblower reported suspicions to a supervisor or other person in a position of authority.

Budget-friendly options

Even if your organization’s budget is tight and you think you have few resources to commit to fraud prevention, know that there’s always something you can do. Active methods can be surprisingly low cost and they certainly are less expensive than being defrauded.

(This is Blog Post #1107)