When it comes to fighting fraud, financial statement audits have much less impact than other methods. A survey of workplace fraud conducted by the Association of Certified Fraud Examiners (ACFE) shows that hotlines do the most to cut companies' losses from fraud, and surprise audits and fraud training are also more effective than internal or external audits.
For example, companies that use hotlines had median fraud losses of $100,000, or 59% lower than the median loss of $245,000 for companies without hotlines. Surprise audits cut companies' median loss by 51.5%, from a median of $244,000 to $100,000, and fraud training for employers cut losses by 50%, from $200,000 to $100,000. Internal audits cut fraud by just 30.6%, according to the ACFE survey, while external audits of financial statements cut fraud just 25%.
"The controls that rated the highest in terms of reducing your loss to fraud were not the things we think of traditionally as fraud detection controls," says John Warren, ACFE's general counsel. "External audits, internal audits, management review–those all ranked in the bottom half of the control list. The things that ranked high, other than hotlines, were things like antifraud training, codes of conduct and employee support programs.
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"Initially that struck us as odd," Warren adds. "No one catches fraud in a fraud training class. But organizations that had all these things, that did fraud training and had codes of conduct and antifraud policies, those are organizations that have made dealing with fraud a priority and I think that's why we saw lower losses at those organizations."
The ACFE survey shows that tips were by far the most frequent method of uncovering frauds, and were responsible for the detection of 40% of the fraud cases examined, followed by management review, which uncovered 15% and internal audit, which uncovered 14%.
The key role played by tips explains the value of hotlines, Warren says. "What the hotline does is make you more effective at gathering tips from employees and customers and vendors," he says. "What our data showed is those people are your best fraud detection tools."
Warren notes that financial statement audits weren't designed to uncover fraud. On the other hand, he says that just knowing that a company conducts surprise audits, which are done without advance warning, can deter employees considering fraudulent activity. Surprise audits are also more focused at looking for irregularities, Warren says, and the fact that there's no warning means perpetrators of fraud don't have time to cover up what they're doing.
The ACFE survey, which examined 1,843 fraud cases around the world, found the median loss was $160,000. Asset misappropriation–which includes larceny, check tampering and monkeying with expenses–was most common, accounting for 90% of the cases, but the least expensive, causing a median loss of $135,000. Financial statement fraud was least common, representing less than 5% of the cases, but the most costly, resulting in a median loss of more than $4 million.
The survey, Report to the Nations on Occupational Fraud & Abuse, is available on ACFE website.
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Susan Kelly
Susan Kelly is a business journalist who has written for Treasury & Risk, FierceCFO, Global Finance, Financial Week, Bridge News and The Bond Buyer.
