MLR

How is most occupational fraud discovered?

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Tips – from employees, customers, vendors and others – are by far the primary way that occupational fraud is detected.

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That’s according to the latest Association of Certified Fraud Examiners Report to the Nations. Tips have been the primary method of fraud detection since the group began tracking data in 2002.

Employee tips led to detection of fraud 43 percent of the time in ACFE’s 2012 study of 1,388 cases – three times more than the next detection method.

Other lesser means of detection were:

  • Management reviews, 14.6 percent
  • Internal audit, 14.4 percent
  • By accident, 7 percent
  • Account reconciliation, 4.8 percent
  • Document examination, 4.1 percent
  • External audit, 3.3 percent
  • Notified by police, 3 percent
  • Surveillance/monitoring, 1.9 percent
  • Confession, 1.5 percent
  • IT controls, 1.1 percent

External audits, which detected fraud in 3.3 percent of cases, should not be relied upon as an organization’s primary fraud detection method, the fraud examiners’ report said, adding, “While external audits serve an important purpose and can have a strong preventive effect on potential fraud, their usefulness as a means of uncovering fraud is limited.”

Fraud awareness training is critical for employees and managers, the report said, and organizations that have anti-fraud training programs experience lower losses.

The study also measured where most tips come from. The majority came from other employees (50.9 percent), and another 12.4 percent of tips were from anonymous sources.

Customers were a major source of tips at 22 percent, along with vendors at 9 percent. Shareholders, competitors and others also provided tips that helped detect fraud.

The significant number of tips from anonymous sources shows the importance of tip hotlines, the study said.

The impact of hotlines can also be seen in other statistics. Organizations with hotlines had only 3 percent of fraud cases found by accident. But accidents were the source of detection in 11 percent of companies without hotlines.

Similarly, internal audit was the detection method in 6 percent of cases for organizations without hotlines and only 1 percent for those with hotlines.