Fraud Prevention
and Detection
Background:
ACFE 2018 Report to the Nations
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What schemes are used to
How is fraud detected?
detect fraud?
What are the warning signs? How can we prevent fraud from
happening?
Fraud Prevention
and Detection
The need for fraud detection and prevention solutions has been increasing, with the
rising revenue losses due to the rise in number of frauds across the globe.
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What is Fraud Detection?
means the identification of actual or expected fraud to take place
within an organization
should be established to uncover fraud events when preventive
measures fail or unmitigated risks are realized
An active detection method involves a deliberate search for misconduct
at the direction of someone within the organization or an internal
control or process that is instrumental in searching for fraud (ACFE).
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Why is fraud detection important?
Benefits of fraud detection includes:
Reduced exposure to fraudulent activities
Reduced cost associated with fraud
Find out vulnerable employees at risk to
fraud
Have organizational controls
Improve the results of organization
Gains the trust and confidence of the
shareholder of the organization
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Most Common Detection Methods
ACFE 2018 Report to the Nations
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Tips and Formal Reporting Mechanism
NOT ALL TIPS COME THROUGH
HOTLINE:
Whistleblowers are most likely to
report to:
Direct Supervisor (32%)
Executive (15%)
Fraud Investigation Team (13%)
Coworker (12%)
Internal Audit (10%)
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Warning Signs and Red Flags
Most common PERSONAL and CORPORATE behavior displayed by perpetrators
WARNING SIGNS OF FRAUD
PERSONAL BEHAVIOR CORPORATE BEHAVIOR
• Living beyond one’s means • Excessive pressure from within the organization
• Severe personal financial difficulties, losses or high • Customer complaints about delivery
debts • Undue emphasis on meeting earnings projections
• Divorce or family problems • Non-adherence to company policies, including
• Wheeler-dealer attitude subordinates being directed to bend or break rules
• Not compensated fairly • Significant or unusual changes in customers or
• No recent raises / cost of living adjustments suppliers
• Unusually close association with vendor/customer • Transactions that lack documentation or normal
approval
• Control issues / unwilling to share duties
• Previous complaints, allegations, or concerns over
• No behavioral red flags company conduct
• Refusal to take vacations or sick time • Irregular or poorly explained management activities
• Irritability, suspisciousness, or defensiveness • Poor IT access controls
• Social isolation • Conflicts of interest are the norm, rather than the
exception
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6 Behavioral red flags
Understanding and recognizing these helps detect fraud and mitigate losses
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Warning Signs and Red Flags
What INTERNAL AND EXTERNAL AUDITORS may have missed
INTERNAL AUDITORS EXTERNAL AUDITORS
Inadequate attention to details Frequent disputes with auditors
No frequent reviews by auditor Disrespect for regulatory bodies
Placing too much trust in key Company engages in opinion
employees shopping
Lack of independent checks on Managers have lied to the auditors
performance or have been overly evasive in
Lack of clear lines of authority and responding to inquiries
responsibility Weak control environment
Lack of segregation of duties Operating and financial decisions
are dominated by a single person or
a few persons acting in concert
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Fraud Tree
How occupational fraud is committed?
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happens when an employee has
an undisclosed economic or
personal interest in a transaction
that adversely affects his or her
employer offering, giving, receiving
or soliciting of anything of
value to influence an act
or decision
offering, giving, or
receiving of anything of
value after a decision
has been made obtaining from another
with the other’s “consent”
having been induced by
wrongful use of actual or
threatened for or fear
Corruption: Misuse of influence in a business transaction that violates duty to the
employer to gain direct or indirect benefit. 70% of corruption cases were perpetrated by
someone in a POSITION OF AUTHORITY.
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happens when an
employee makes a
taking cash “off the top”
distribution of company
of the daily receipts of a
funds for dishonest
business and officially
purpose
reporting a lower total
happens when an
employee uses
company property for
purposes other than intentional taking of an
its intended use employer’s cash or
property without the
consent or against the
will of the employer
Asset Misappropriation: the illegal taking of an organization’s property without freely-
given consent.
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Fraudulent Statement: Intentional misstatement or omission of material information in
the organizations reports.
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Fraud Schemes
Loss and frequency
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Concealment of Fraud Schemes
Majority of fraudsters proactively attempted to conceal their schemes
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Fraud Prevention Measures
• Avoid setting • Officers and managers • Maintain accurate and
unachievable financial should set an example complete internal
goals by promoting honesty in accounting records
• Remove operational the accounting and other • Monitor related party
obstacles blocking areas and interpersonal
effective financial • All dishonest acts business transactions
performance should not be permitted • Establish a physical
• Establish clear and as these will create a security system to secure
uniform accounting dishonest environment company assets
policies and procedures • Organizational policies • Divide important
with no exception clauses should be clear with no functions
gray areas • Maintain accurate
• Consequences for personnel records,
violating rules and including background
punishment of violators checks on new
should be clear and employees
implemented without • Establish a system for
exceptions. anonymous reporting
of violations of
company policies
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Effective Fraud Prevention
Four Key Elements
Significantly influence the Development and
control environment and the implementation of rigorous
‘tone at the top’. fraud control policy
document = effective
Oversight should extend to fraud prevention
management, employees, FRAUD
reporting, and internal Trainings are to be done at
control and other bodies PREVENTION the time of hiring and
periodically thereafter
The first line of defense
against fraud
Organizations should have
clearly defined pre-
employment standards
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Anti-Fraud Controls
Frequently used anti-fraud controls
Variations in the implementation rates of anti-fraud controls provide an interesting
perspective on what organizations are doing to manage fraud risk and helpful
benchmarks for an organizations’ anti-fraud programs.
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THANK YOU!!
Sources:
• Fraud Master Class Module (P&A Grant Thornton, 2018)
• 2018 ACFE Report to the Nations
• Fraud - A Guide to its Prevention, Detection and Investigation (PWC, 2007)
