Fraud detection within the company is the most important stage in anti-fraud investigations. Usually, the investigator searches for signs that could identify fraud, but, in many cases, occupational fraud shows up in unexpected ways.
ACFE Global Study 2020 shows several ways for initial fraud detection, as they emerged from the private investigators’ work in 2020.
Although it may seem surprising, most often, a fraud’s investigation starts after receiving some sort of information from an employee. Basically, 40% of frauds are discovered this way. A small tip, a piece of data, a clue for investigations coming from right inside the company.
Another way fraud comes to the surface is evaluating the management’s performance. 15% of fraud cases are solved by investigating the management processes and detecting certain anomalies. Among other ways used by the private investigators in order to identify fraud are: external audit or analysis, studying and interpretation of the company’s documents, monitoring employees’ activity, notifications from authorities, IT controls or, in rare cases, the perpetrator ends up confessing himself fraud.
In other words, an employee reports occupational fraud in 50% of cases; customers report illegality in 22% of cases, an anonymous tip reveals 15% of fraud, a distributor or a supplier contributes to solving 11% of frauds, while a competitor discovers and discloses it in only 2% of cases. In most cases, the investor or business owner is the last to find out about the fraudulent situation.
Anti-fraud investigators divide fraud detection methods into 3 categories:
- Passive detection methods
- Potentially active or passive exposure methods
- Active methods of disclosing fraud.
The gathered and correlated data shows that the passive methods of disclosing fraud caused higher value damage, were discovered after a long time and, overall, involved higher costs for the company. The best-known passive methods are fraud’s accidental discovery, fraud confession by the perpetrator and authority’s notification.
Potentially passive or active methods of detecting fraud refer to an external audit’s results or information from an employee, while active methods refer to the anti-fraud investigation carried out specifically to detect problems. In this case, frauds are not discovered by chance, but certain efforts are made to uncover them. Among the active methods of fraud detection, we mention documents examination, management’s evaluation, internal research, accounting reconciliation, IT controls and monitoring the company’s activity.
Given that in 40% of fraud cases, the disclosure is made through briefing, it is interesting to whom, exactly, this information reaches. Generally, in situations where’s a clue for investigations, the informant does not use formal reporting mechanisms or channels but prefers to talk about the suspicion he has directly with his superior, the anti-fraud investigator or other persons considered to be “authoritative” in this matter – employees of the Human Resources department or even colleagues.
That is why it is very important for companies to have regular employee training, regarding the information they can send or receive about possible frauds and what to do when they encounter such situations. The existence of a secure communication channel, through which employees can report their suspicions or certainties of fraud, is beneficial and recommended to all companies.
Anti-fraud investigations aim to find out the truth, while active methods of detecting fraud are the most effective and profitable for the company. Are avoided, thus, situations in which the company finds out too late about a fraud, the amount of damage is increased, and the fraudulent phenomenon affects the company and investors’ reputation.