Article written by:
Ethan Lane, CPA
Assurance Senior


“Company Loses Millions Due to Fraud” is a headline no one wants to experience. Unfortunately, it is a concept we hear and read about in the news on a regular basis. So, how do you detect and prevent employee fraud?

Tips are the most common detection method

According to the (ACFE) Association of Certified Fraud Examiners’ 2018 Report to the Nations, tips account for 40% of all fraud cases being detected. Of this 40%, 53% of tips are from employees of the victim organization, 32% are from individuals outside of the organization such as customers, vendors and competitors, and the remaining 15% of tips are from anonymous whistleblowers. What these statistics tell us is organizations that have the available resources to invest in reporting hotlines have a higher likelihood of detecting occupational fraud. According to the ACFE’s report, 63% of victim organizations had reporting hotlines and the fraud losses were 50% smaller at organizations with hotlines than those without.

Perpetrators often display behavioral red flags

In 85% of occupational fraud cases, fraudsters displayed at least one behavioral red flag, and in 50% of cases, the individual exhibited multiple red flags, according to the ACFE’s report. Two of these behavioral red flags, which were exhibited by perpetrators in 70% of cases examined, were living beyond their means and having financial difficulties. These two red flags have been the most common in every bi-annual study by the ACFE dating back to 2008.

Level of authority directly correlates to the size of the fraud loss

While owners/executives only committed 19% of the frauds in the ACFE’s 2018 study, the schemes committed by these individuals resulted in a median loss of $850,000, which was nearly six times larger than the median loss caused by managers, and 17 times larger than the median loss caused by low-level employees. Three possible reasons that may explain why this variation exists: 1) high-level perpetrators may have greater access to an organization’s assets, 2) they may have greater technical ability to commit and conceal the fraud, and 3) owners/executives may be able to use their authority to override internal controls that low-level employees cannot.

Internal control weaknesses allowed for the fraud to occur

Nearly half of the frauds examined by the ACFE could have been prevented or detected earlier by stronger internal control measures. For over half of all cases examined, lack of internal controls or override of existing controls were cited as the reasons that enabled the fraud to occur. So, what can organizations do to prevent fraud from occurring? The best defense is to implement, maintain, and monitor a system of internal controls. However, for small companies that may not have the necessary employees or resources to invest in internal control measures, having reporting hotlines available across the organization may allow for a fraud to be prevented or detected before it can cause irreparable reputational and transactional damage.

Reach out to your GBQ advisor with help strengthening your system of internal control or implementing a fraud reporting hotline at your organization.


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