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7 Tips for Minimizing Internal Fraud

by Aaron Nelson on October 15, 2014

Minimizing Internal Fraud

Internal corporate fraud is most common in banking and financial services, government, and health care. In fact, the ACFE’s Report to the Nations on Occupational Fraud and Abuse states that the typical organization loses 5% of revenues each year to fraud. If applied to the 2013 estimated Gross World Product, this translates to a potential projected global fraud loss of nearly $3.7 trillion. Typically, fraud is most often committed by the accounting department or other upper management. Fraud is a universal problem and does not discriminate. The following are a few tips on how to improve internal fraud detection within your organization.

1. Get Involved

  • Routinely tour the business and all departments within the organization.

  • Include an experienced business employee on your detection team.

  • Become familiar with competitor processes.

  • Interview key personnel.

  • Analyze financial statements.

  • Work closely with auditors/security personnel.

2. Use a Hotline

By far, tips are consistently the most common fraud detection technique. The numbers are high – over 40% of all cases in the ACFE report were detected by a whistleblower tip. This equates to more than twice the rate of other detection methods. In fact, employees account for nearly half of all tips that led to the discovery of fraud. Hotlines can also ensure anonymity of the reporter, making them feel more comfortable and at ease when reporting a concern.

3. Create Reporting Mechanisms

In addition to a hotline, it is a good idea to be accessible to your employees, customers, and vendors. Your employees aren’t the only people with eyes and ears on your organization. Fraud can be observed by contractors, vendors, customers, and members of the public. Be sure fraud tipsters can access your tip line via phone, email, mail, fax, and web. Also, implementing channels of communication, such as “open door” policies, surveys, and frequent meetings, will be beneficial for everyone. Providing individuals a means to report suspicious activity is a critical part of an anti-fraud program.

4. Set up Training

Train all your employees on what fraud is, what to look out for, and how to report it. Targeted fraud awareness training for employees and managers is a critical component of a well-rounded program for preventing and detecting fraud. Train your employees once or twice a year on how and where they can report on any behaviors they think are questionable and may go against your corporate ethics and culture.

5. Watch for Red Flags

Many fraudsters exhibit certain behavioral traits that can be warning signs of their crimes. For example, they may be living beyond their means, or suddenly purchasing new cars and homes. Also, they may have unusually close associations with vendors or customers. Another thing to look for is changes in customer payment patterns. Sudden, unexplained variances in the amount of time a customer takes to pay should be investigated. According to the ACFE’s Report, in 92% of the cases, at least one common behavioral red flag was detected. Managers, employees, and auditors should be educated on these common behavioral patterns and encouraged to consider them carefully.

6. Reduce Opportunity

If possible, try to segregate sensitive duties and tasks between more than one employee. Put internal controls in place to regularly track or audit these sensitive duties. Scrutinize corporate credit card charges and employee expense reimbursements. Also, conduct targeted internal audits of the accounting department on an unannounced basis.

7. Improve Corporate Culture

Develop a culture and environment of integrity. According to a study conducted by the Lowers Risk Group, the actions of top management can induce everyone in the organization to internalize the positive attitudes and behaviors that prevent internal fraud or make its detection more likely. An employee is less likely to commit a fraud if they feel like they are a contributing member of the organization, and if management also exhibits actions of integrity and trust.

Detecting and preventing internal fraud can be very difficult. Fraudsters develop new schemes all the time, and those schemes grow more and more sophisticated to elude easy detection. However, fraud can be preventable.

For more information on how to improve internal fraud detection within your organization, or if you have any other questions or comments, contact us today.

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