A 20-year employee at a city school charged with managing adult education programs was known as a hard worker who had secured her colleagues’ respect. But when external auditors came into the district to review the school’s financial records, it didn’t take long to realize that something just wasn’t adding up. Questions began to circulate and people starting comparing notes. It wasn’t until her co-workers started questioning how she could afford the costly gifts during the holidays and lavish purchases made to redecorate her home that all the pieces began to fit together. After all, that type of money was certainly not in line with her position’s established pay scale.
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The funds this woman used to redecorate her home were not acquired honestly. They were obtained as part of an embezzlement scheme that lasted for at least two years. Because she attempted to cover her tracks by destroying the financial records, forensic accounting professionals were called in to reconstruct the activity using the school’s enrollment records.
The fraudster was thwarted in this instance … but this is certainly not an isolated incident. In fact, it happens more than you might think.
According to the 2016 Report to the Nation on Occupational Fraud & Abuse by the Association of Certified Fraud Examiners (ACFE), the typical organization loses 5 percent of its annual revenue to fraud. The group estimates that the potential financial loss to organizations worldwide due to fraud is at least $3.7 trillion dollars. The median loss in this particular study, which compiled data from 2,410 cases of occupational fraud in 114 different countries, was $150,000. Nearly one-quarter of all frauds in this worldwide study topped $1 million or more.
What Are You Doing To Prevent Fraud In Your Organization?
If you are looking to significantly decrease the fraud threat in your organization you must have a strategy in place to prevent and detect it. And if a fraudster is in your midst, implementation of anti-fraud controls are effective are an effective way to shut fraud down faster. The Report to the Nations states that the presence of anti-fraud controls correlated to fewer losses and quicker detection.
Which Control Is The Right Control?
According to the report, the top five anti-fraud controls utilized by organizations today are:
- External Audit of Financial Statements
- Code of Conduct
- Internal Audit Departments
- Management Certification of Financial Statements
- And External Audit Internal Control over Financial Reporting
But are they the most effective?
Over the course of this study, researchers found that the five most effective controls when it comes to preventing and stopping fraud are:
- Internal Audits
- Management Review
- By Accident
- Account Reconciliation
A key opportunity to guard against fraudulent behavior is still being missed. For example, while tips were the most common detection method regardless of whether a hotline was in place, fraud schemes were detected by tip in 47.3 percent of cases at organizations that had fraud hotlines. In contrast, only 28.2 percent of cases were detected by tips at organizations without hotlines. It’s clear that businesses and organizations should invest in a fraud prevention strategy that encourages anonymous tips if they aren’t doing so already.
By Annie Yoder, CPA, CFE, CFF (New Philadelphia office)