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
PERSONAL BEHAVIOR
• Living beyond one’s means
• Severe personal financial difficulties, losses or high
debts
• Divorce or family problems
• Wheeler-dealer attitude
• Not compensated fairly
• No recent raises / cost of living adjustments
• Unusually close association with vendor/customer
• Control issues / unwilling to share duties
• No behavioral red flags
• Refusal to take vacations or sick time
• Irritability, suspisciousness, or defensiveness
• Social isolation
SIGNS OF FRAUD
CORPORATE BEHAVIOR
• Excessive pressure from within the organization
• Customer complaints about delivery
• Undue emphasis on meeting earnings projections
• Non-adherence to company policies, including
subordinates being directed to bend or break rules
• Significant or unusual changes in customers or
suppliers
• Transactions that lack documentation or normal
approval
• Previous complaints, allegations, or concerns over
company conduct
• Irregular or poorly explained management activities
• Poor IT access controls
• 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
 Inadequate attention to details
 No frequent reviews by auditor
 Placing too much trust in key
employees
 Lack of independent checks on
performance
 Lack of clear lines of authority and
responsibility
 Lack of segregation of duties
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EXTERNAL AUDITORS
 Frequent disputes with auditors
 Disrespect for regulatory bodies
 Company engages in opinion
shopping
 Managers have lied to the auditors
or have been overly evasive in
responding to inquiries
 Weak control environment
 Operating and financial decisions
are dominated by a single person or
a few persons acting in concert
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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15
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
control environment and the
‘tone at the top’.
Oversight should extend to
management, employees,
reporting, and internal
control and other bodies
Development and
implementation of rigorous
fraud control policy
document = effective
fraud prevention
FRAUD
Trainings are to be done at
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)