The Importance of Developing a Fraud Detection and Prevention Program

Fraud in every form that there is has reached an epidemic proportion which hurts businesses and individuals alike. Entities worldwide lose hundreds of billions of dollars in revenue due to fraud whether through theft, lost or misused funds, embezzlement, asset misappropriation or any other type of crime.

According to the 2014 Report to the Nations on Occupational Fraud and Abuse from the Association of Certified Fraud Examiners (ACFE), organizations worldwide lose an average of five percent of revenues to fraud each year for a median of $145,000. Applied to the estimated 2014 Gross World Product, this figure translates to a potential total fraud loss of more than $3.7 trillion (2014)

Economic problems force companies to reduce internal controls which increases the risk of fraud. Fraud detection and prevention is greatly needed and specialists are needed to investigate the crimes. Forensic accounts and Certified Fraud Examiners are the ones to perform these services. As fraud continues to increase it is necessary for all accountants and auditors to learn some of the elements of fraud prevention in order to protect the company for which they work.

Every company needs a fraud prevention plan that can be easily implemented. The following items are the building blocks of a good fraud prevention program.

Build a profile of potential frauds.

Create a risk assessment listing of areas in your business that could be likely to see fraud happen. Determine which types of fraud could occur in each area. Concentrate on risks that could negatively impact the business the most. Include important stakeholders and decision makers. If you identify a particular area as being prone to fraud, include the manager of that area in the discussions.

Test transactions for possible indicators of fraud.

This can be a time consuming project, but you must test all data, not merely samples as is done in a financial audit. Fraudulent transactions do not occur randomly. By using sampling you could identify some problematic transactions and miss others. These transactions must also be considered in light of internal controls and how they are impacted. Don't overlook small anomalies believing that small transactions could not relate to fraud. Nothing could be further from the truth.

Develop internal controls by executing ongoing auditing and monitoring.

Analyze how transactions withstand internal control measures. Continually analyze for fraud detection means that all transactions should be analyzed. Be sure to use a software program designed for such analysis. By doing this task you can improve the overall effectiveness, reliability and quality of your fraud detection program. If you run the analysis daily, any anomalies will show up by morning if run overnight. Be sure to run the analysis from a manager's or executives computer to ensure privacy.

Convey monitoring activities to all in the organization.

Fraud prevention entails conveying to all people in the organization the concepts being used to fight fraud. If all employees realized that there are systems in place to alert managers of fraud or breach of controls, then the likelihood of fraud being committed is greatly reduced. If people know that transactions are being monitored in this way it tends to discourage them for fear of being caught.

Notify management immediately when any indications of wrongdoing occurs.

When any issues arise, notify the appropriate managers immediately. Create audit reports that contain recommendations on how to improve internal controls or change certain processes to help eliminate recurrence. Be sure to quantify the impact on the business. By providing managers with how the fraud is impacting the company there is greater likelihood that improvements can be made.

Improve all internal controls.

Separation of duties is critical. If the same person can issue checks, reconcile the bank account and handle payroll, there is a serious lack of internal controls.

Expand the scope and repeat.

Re-evaluate your fraud system considering the most common fraud schemes and if they appear to be occurring in your business. Using analytics will help identify weaknesses in internal controls and show where they are ineffective. Investigate all patterns and fraud indicators to determine where the problems lie.

Summary

Fraud losses as stated earlier can be mitigated if the right program is established. A properly designed fraud detection system which analyzes transactions on a daily basis can significantly reduce the likelihood of fraud. Keep in mind that the median fraud cost to businesses worldwide is $145,000. To a small business that can be devastating. To a larger business the impact might not be felt but consider how much revenue must be increased to make up for the loss. Effective detection techniques can serve to help deter potential fraudsters. If employees know they are being watched and the chances of being caught are greatly increased, then they might think twice before committing the crime.

Regulatory requirements and compliance demands have impacted businesses to the extent that they should not wonder if they should implement a fraud detection program, but how quickly can they execute that program. Technology is a great factor in improving overall fraud deterrence programs.