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Fraud Prevention in 2019


Certified Fraud Examiners (CFEs) know just how devastating a fraud can be to victims.  We have seen several cases each year, here in our own community, that have had a significant impact on the victim business or organization.  Business leaders need to understand how much is at stake as they assess their risks and make resource allocation decisions.

According to the “Report to the Nations – 2018 Global Study on Occupational Fraud and Abuse,” from the Association of Certified Fraud Examiners (ACFE), median losses were $130,000 in 2018, but there were significant cases that reported losses in excess of $1,000,000.  It is imperative in 2019 to revisit your fraud controls in place and recognize the red flags of fraud.

Occupational fraud is the most prevalent type of fraud that organizations of all types, sizes, locations and industries are faced with today.  As a result, management has had to re-evaluate their practice for internal audits, risk management, compliance, governance and internal controls to have programs and policies in place to prevent and detect fraud.  Given the ever-changing business and regulatory environment and the number and diversity of types of frauds being committed against companies globally, internal controls must be reviewed, evaluated, tested and strengthened regularly.  The following are some anti-fraud controls to consider for your organization:

  • Code of Conduct
  • External audit of financial statements
  • Internal audit department
  • Management certification of financial statements
  • External audit of internal controls over financial reporting
  • Management review
  • Hotline
  • Independent audit committee
  • Employee support programs
  • Anti-fraud policy or plan
  • Fraud training for employees
  • Fraud training for managers/executives
  • Dedicated fraud department, function or team
  • Formal fraud risk assessments
  • Surprise audits
  • Proactive data monitoring/analysis
  • Job rotation/mandatory vacation
  • Rewards for whistleblowers

How prepared are you to detect fraud if it slips through the cracks, or even detect fraudulent activity in your organization?

All organizations are at risk of fraud, each with their own way of preventing it, such as implementing specific policies, procedures, programs or providing employee training.  However, preventive measures cannot guarantee that fraud will not be committed.

Typically, these crimes are committed by long-time employees who are in a position of trust, often within the accounting department, and are individuals trusted by management or by the business owner.  These individuals, unfortunately, often have the greatest opportunity to commit fraud.  Trust, combined with a lack of segregation of duties and a poor internal control environment can be the framework for employee fraud.

Fraud perpetrators often exhibit certain behavioral traits that can indicate their intention to commit fraud—demonstrated in red flags such as living beyond their means or refusing to take a vacation.  The management team for any organization should be trained to recognize these and other common behavioral signs that a fraud might be occurring.  Red flags should not be ignored as they might be the key to detecting or deterring a fraud.  To help you detect fraud in your organization, listed below are some common behavioral red flags that a fraudster could exhibit indicating they are engaged in illegal activity.  While one of these may not necessarily be cause for concern, the presence of two or more should raise suspicion and may require a more in-depth examination:

  • Living beyond means
  • Financial difficulties
  • Unusually close association with vendor/customer
  • Control issues, unwillingness to share duties
  • Divorce/family problems
  • “Wheeler-dealer” attitude
  • Irritability, suspiciousness or defensiveness
  • Addiction problems
  • Complained about inadequate pay
  • Excessive pressure from within organization
  • Social isolation
  • Past legal problems
  • Refusal to take vacations
  • Past employment-related problems
  • Complained about lack of authority
  • Excessive family/peer pressure for success
  • Instability in life circumstances

To help further prevent fraud in your organization, a fraud detection plan should be established.  Once the plan has been finalized, all employees should be made aware of it and how it will be implemented.  Those who are planning to commit fraud will know that management is monitoring employee activity.  Additionally, honest employees, who are not tempted to engage in fraudulent activity, will be made aware of the possible signs of fraud or theft and become assets to the organization in preventing fraud.

Occupational fraud can happen in any organization and may result in a huge financial loss, legal costs and a ruined reputation, ultimately leading to the breakdown of the organization.  By having the proper internal controls in place, an organization can significantly reduce their risk of fraudulent activity from taking place or cut their losses if a fraud has already occurred.

Our Fraud detection specialists are forward-thinking professionals, known for their innovative approach to solving problems, their effective communication and their ability to deliver results.  If we can be of assistance to you, contact Christopher Didio, CPA, CFE at cdidio@dmcpas.com or 315-472-9127.