Helping Business Owners Detect And Deter Fraud

June 2013       Download PDF      Print

A 2012 report by the Association of Certified Fraud Examiners (ACFE) found that the average company loses approximately 5% of its revenues through fraudulent activity every year. Advisors can play a valuable role in helping business owners prevent fraud within their organizations by helping them understand the most effective ways to detect and deter such behavior.

Business owners are most likely to encounter fraudulent behavior in the form of asset misappropriation, corruption, or financial statement fraud. According to the ACFE, companies that establish reporting hotlines for fraudulent behavior have been most effective at detecting fraud. The American Institute of Certified Public Accountants (AICPA) has found that implementing surprise exams can also be an effective means to deter fraud.

Establishing a hotline

The ACFE report states that fraud is most commonly detected through tips provided by colleagues, customers, or vendors. Since the organization began tracking fraud detection data in 2002, it reports that 54% of corruption cases and 42% of both asset misappropriation and financial statement fraud cases have been discovered through tips.

The ACFE found that companies with a telephone reporting hotline were more effective at catching fraudulent activity. Businesses without a hotline make a larger percentage of fraud discoveries by accident compared to businesses that have implemented a similar reporting tool. While such hotlines are a requirement for public companies, many private companies would also benefit from providing staff with a channel for reporting suspicious activity.

Unscheduled fraud exams

While hotlines help detect fraudulent behavior, companies often lack processes or internal controls to prevent it from occurring in the first place. Implementing surprise exams can both detect and deter fraud. Numerous studies have found that people who commit fraud believe the risk of getting caught is minimal. Potential thieves will be discouraged from perpetrating fraud if they witness others being caught in the act.

The AICPA's AU section 316 (formerly Statement of Auditing Standards No. 99), Consideration of Fraud in a Financial Statement Audit, also recommends that experts conduct surprise procedures on test areas, locations, and accounts that would otherwise not receive scrutiny. Experts can design tests that employees can't predict or expect based on the company's internal controls and other standard procedures.

By conducting scheduled exams, a company may be allowing financially damaging fraud schemes to go unnoticed while giving the thieves ample warning to cover their crimes. Even if an owner is confident in his company's internal controls, a surprise exam can be an effective tool for testing whether transactions comply with those controls.

Be proactive

Hotlines and surprise exams only go so far in detecting and deterring fraud. Advisors can encourage their clients to establish proactive fraud prevention and detection measures that may include fraud training for managers and employees, employee support programs, internal audits, and written anti-fraud policies and codes of conduct. Companies should also consult experienced fraud experts to follow up on suspected wrongdoing and for assistance in implementing internal controls and processes to prevent fraud from occurring.

Related Tools

  • Consider using the AICPA's Fraud Risk Self-Assessment to identify areas where your company is susceptible to fraud.

    Download >