Fraud, according to Webster’s Dictionary, is defined as “illegal activities undertaken by an individual or company that are done to give an advantage to the perpetrator,” but any business owner knows that this definition is far more complicated than that. It’s a huge risk that can affect your company’s bottom line, employee salary, and the trust of your financial investors. And, unfortunately, while it’s not completely possible to prevent fraud, there are some ways that you can detect it early to prevent your company from losing any more money than it already has. Here are 5 of the ways that you can detect fraud that might be happening in your organization. 

1: Utilize Your Company’s Tip Lines

The most common and effective way to detect fraud, anonymous cell and online tip lines are a great way to ensure that your company doesn’t suffer more than they already have from fraud. In their 2018 report to the nations, the Association for Certified Fraud Examiners (ACFE) found that 40% of the fraud cases from that year that were reported were detected through their respective company’s tip lines. And if that doesn’t convince you of their importance, the ACFE also found in that same report that fraud losses were 50% smaller at the organizations with fraud tip lines than those without them. 

To make full use of the tip line, make sure that there is a disclosure policy in place for tipsters that includes the following information:

• The types of tips that are accepted by the company’s hotline. It doesn’t have to just be for fraud! It can also be a place for employees to report ethics and policy violations, for example. 
• The rights of the accused person that the tipster is reporting. This ensures that the possible case of fraud will be handled responsibly and within the rights of the accused. 
• The protected rights of the tipster. These would be laws such as those that relate to anonymity, confidentiality, and whistleblower protection.

Finally, make sure that you also promote your tip line so that it is fully used by your company. You can do this by incorporating it into your employee training or by including information about the tip line at the bottom of your employee’s pay stubs.

2: Enlist the Services of an External Auditor

External Auditors are required by the American Institute of Certified Public Accountants (AICPA) that they must conduct their audits according to protocol and professional standards to further ensure that their financial statements are free from material misstatements or unethical accusations. 

They are your first line of defense in detecting financial statement fraud: the most expensive method of company fraud. The ACFE found that there was a median of $800 thousand in losses for companies that were a victim of financial statement fraud. So, it’s important to enlist an external auditor’s services as soon as you think you might be suffering from this type of fraud to help you mitigate your company’s losses 

The AICPA has a document called “Consideration of Fraud in a Financial Statement Audit” that lays out clear and substantial guidelines for external auditors to use for detecting fraud in a section labeled AU-C section 240. Here, it gives guidance for external auditors in dealing with the following parts of the audit report: the risks of misstatement in light of the organization’s existing programs and controls; the likelihood of management override of controls; retrospective reviews of management’s judgments related to significant estimates and fraud risk factors.

3: Develop a Strategy with an Internal Auditor and Inspector General

Internal auditors and inspector generals usually work together to develop a plan for investigating fraud within a company. Since discovering fraud is a routine part of their internal auditing work, they can help you develop a system for finding indications of fraud and flagging suspicious activities for fraud investigation. So, you can see that the internal auditors and inspector generals do similar work to external auditors except they also look at suspect organizational policies and procedures that don’t necessarily involve fraud.

You may think that since their work is so similar to that of an external auditor’s that you will likely not need to work with an internal auditor and inspector general on developing a strategy for investigating internal fraud, but that is not the case. The ACFE has found in one of their studies that internal fraud is the second most common form of fraud. Therefore, having a system in place to detect this kind of fraud in your company is very important for minimizing your risks of being targeted for this kind of criminal activity.

4: Create a Department Dedicated to Detecting Fraud

Security departments, such as those that are in banks that look at loss management and account fraud, operate independently of the company in functional areas that are at especially significant risk of being used for acts of fraud. They are usually run by a chief information officer, controller, or internal auditor. Having a department devoted to fraud detection can be especially useful for companies that consistently deal with sensitive information that can be used for fraud or other white-collar crimes because it can ensure that the company is always ensured and ready to face fraud detection head-on in case of an emergency.

 5: Accidental Fraud Detection

In the auditing world, this is commonly referred to as “passive fraud detection.” This occurs when someone happens upon an incident of fraud accidentally, there’s a confession made by the criminal engaging in fraud, or if there’s been a notification of an occurring incident of fraud that is freely given. Usually, however, by the time that passive fraud detection is underway the company has already lost a significant amount of money for a great amount of time. Therefore, it’s good to have an active method of fraud detection in a place like the ones that have been mentioned in this article. 

Don’t Wait Until It’s Too Late! Baird Audit Group Can Help You Detect Fraud Today

The Baird Audit Group has performed audits of and consulted with, municipalities, counties, school districts, authorities, libraries, not-for-profit organizations, churches, pension plans, manufacturing, commercial and retail clients. So, trust us when we say that no matter the size or nature of your company, our audit services are still useful to you. With over 75+ years of experience of our team combined, you can be confident in the fact that our independent audit services, audit reviews, or compilations will be handled by seasoned professionals who are ready to help you detect fraud in your company and more. Call us today at 706.855.9500 or visit our website to learn more about how The Baird Audit Group can help get your company back on its feet.