Tips Remain the Most Common Method of Fraud Detection

Organizations can benefit now more than ever from whistleblower hotlines and employee fraud education programs.

The typical organization loses 7 percent of its annual revenues to occupational fraud, according to the Association of Certified Fraud Examiners' (ACFE) 2008 Report to the Nation on Occupational Fraud and Abuse. Losses due to occupational fraud for all U.S. organizations in 2007 totaled US $994 billion.

Focus on anti-fraud controls in the wake of the U.S. Sarbanes-Oxley Act of 2002 has helped deter would-be fraudsters, but ACFE's 2008 report shows that occupational fraud remains a significant problem. The report also reveals that these types of fraud are much more likely to be detected by tips than by audits or controls. Tips were also the most common means of detection in 2002, 2004, and 2006.

Tips regarding fraud come from many sources including employees, customers, vendors, shareholders or owners, competitors, and anonymous individuals, according to ACFE's report. Organizations that focus on refining their detection efforts by establishing formal structures such as a whistleblower hotline to receive reports about possible fraudulent conduct are in the best position to quickly detect fraud. Of the 417 cases studied for the ACFE report, 31 percent of fraud tips were received via a hotline or other formal reporting system. Managing the Business Risk of Fraud: A Practical Guide, sponsored by The Institute of Internal Auditors, The American Institute of Certified Public Accountants, and ACFE, suggests that knowledge that a whistleblower hotline is in place actually can help prevent fraud because individuals may fear that a fraud will be discovered and reported.

"It's Never Too Late," featured in the August 2006 issue of Internal Auditor Magazine, gives a real-life example of how lack of appropriate procedures for handling complaints nearly deters a whistleblower from reporting a suspected fraud.

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