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Detecting Fraud With Proactive Measures

Image of a businessman workplace with papers

Each year, businesses lose about 5% of revenue to fraud, according to Occupational Fraud 2022: A Report to the Nations. A key takeaway from the biennial report published by the Association of Certified Fraud Examiners (ACFE) is that active detection methods are far more effective than passive methods in reducing fraud loss and duration. Unfortunately, many companies fail to use these methods to their full potential.

How do active and passive detection methods differ?

The best way to minimize fraud losses and the duration of fraud scams is to implement antifraud controls to actively detect schemes, rather than waiting to be notified by police or receive confessions. The ACFE study found that frauds detected using passive methods — where incidents came to the victims’ attention through no effort of their own — tend to last longer and produce larger losses than those detected by active methods. Examples of effective antifraud controls include data monitoring and analysis, account reconciliation, internal and surprise audits, and management review.

Active methods of detection can significantly lower fraud durations and losses. For example, frauds detected by account reconciliation had a median duration of eight months and a median loss of $74,000. By comparison, fraud detected through notification by police had a median duration of 18 months and a median loss of $500,000.

Job rotation, mandatory vacation policies and surprise audits can be especially effective ways to fight fraud. On average, these proactive measures cut median losses and durations in half. Yet only 25% of the organizations in the ACFE study had job rotation or mandatory vacation policies in place — and just 42% had implemented surprise audits. These findings suggest that many organizations have an opportunity to add these highly effective, low-cost tools to their antifraud arsenal.

Are tips considered active or passive?

The ACFE categorized tips — the leading fraud detection method — as “potentially active or passive,” because they may or may not involve proactive efforts designed to identify fraud. Organizations that proactively use hotlines for reporting misconduct detected fraud by tips more often (47% of cases) than those without hotlines (31% of cases).

More than half of tips came from employees, but nearly one-third came from outside parties, such as customers and vendors. To ensure that tips are used as an active detection method, an organization should set up a hotline, provide training, and promote its use among employees, supply chain partners and others. If possible, hotline users should be able to make anonymous reports. It’s also noteworthy that online and email reporting mechanisms tend to be more prevalent today than telephone hotlines.

What other statistics did the report reveal?

Here are more key findings from the ACFE’s 2022 study. These statistics underscore the importance of taking steps to detect fraud proactively rather than passively.

  • Asset misappropriation occurred in 86% of cases. It was the most common but least costly type of occupational fraud, with a median loss of $100,000.
  • Financial statement fraud occurred in 9% of cases. It was the least common but costliest type of occupational fraud, with a median loss of $593,000.
  • Corruption, such as bribery or conflicts of interest, occurred in half of cases. It caused a median loss of $150,000.
  • Small businesses with fewer than 100 employees lost 50% more per fraud scheme ($150,000 median loss) than larger businesses ($100,000 median loss). In general, small businesses have fewer resources to implement robust antifraud controls.

Occupational fraud victims that attempt to recover losses from perpetrators are rarely made whole. According to the ACFE survey, 54% of victims in the United States recovered nothing, 33% made a partial recovery and only 13% fully recovered their losses. The bigger the loss, the less likely the victim was to make a full recovery.

To catch a thief

Organizations that implement active antifraud controls can dramatically reduce their losses. In addition to investigating suspicious behaviors, a forensic accounting expert can evaluate a company’s controls, identify potential weaknesses and recommend ways to lower risks — before fraud strikes

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