Detecting Fraud and Corruption in the Workplace

The various types of fraud and corruption seen in today’s work environment range significantly, thus posing a unique challenge to identifying these threats in the first place. From asset misappropriation to data theft, from payroll fraud to vendor fraud, and from accounting fraud to bribery, detecting fraud and corruption in the workplace no easy feat. But with the prevalence of these threats only rising, determining methods to reduce and prevent fraud is imperative.

Research from the Association of Certified Fraud Examiners (ACFE) estimates that about 5 percent of annual revenues are lost to fraud. With such costly outcomes, proactive measures must be developed and reassessed on a regular basis. Organizations who lack measures to identify fraudulent activities will be dealing with not only the financial repercussions, but also with the consequences of a damaged reputation.

To better understand the reasoning behind fraud, experts developed a framework with which is analyze prospective perpetrators. Known as the fraud triangle, fraud typically occurs because of:

  1. Pressure
  2. Opportunity
  3. Rationalization

The combination of these factors explain the reasoning behind a person’s motivation to commit fraud in the workplace.

Methods of Fraud Detection

Fraud and corruption do not stay within the commercial constraints of business. Not-for-profit organizations are just as susceptible as their for-profit counterparts. Prevention is certainly the most effective method of protection, but it is important to recognize that all fraud and corruption is not preventable. As such, senior management must bring fraud detection into the spotlight.

With early detection as the primary goal, keep the following methods in mind when developing a fraud detection and corruption prevention strategy:

  • Fraud detection through the use of external auditors. For example, when a large loss is identified within an organization financial statement auditors will likely be able to highlight where fraud may be present.
  • Utilizing fraud tip lines. This is actually the most commonly utilized and most effective fraud detection method. Research has shown that companies that use a tip line saw significantly less fraud losses.
  • Creating a new department solely dedicated to fraud detection. An independent department focused on fraud and corruption can not only identify prospective fraud and corruption, but will also serve as a preventative measure.
  • An internal audit is another one of the most effective measures in fraud detection. This person(s) will also be able to institute a system that flags suspicious activities within the organization.
  • Passive fraud detection refers to fraud that is discovered accidentally. Fraud perpetrators often make errors and mistakes that bring their illegal behavior to light. Unfortunately, this method of fraud detection is almost always the most costly, as the fraud in this scenario has likely been going on for a longer period of time.

Detecting fraud is no easy task, but by taking strategic measures, both internally and externally, an organization is poised to identify such activity before the losses are too substantial. While these fraud detection measures are effective, fraud prevention must be the ultimate goal for any company. From the implementation of internal controls to hiring outside experts, organizations both large and small and both commercial and not-for-profit must take fraud and corruption in the workplace seriously.

At Ellrich, Neal, Smith & Stohlman, P.A., our staff includes five Certified Fraud Examiners who are involved in fraud detection and prevention engagements. Such engagements include evaluation of an organization’s internal controls, identification and measurement of frauds, and implementation of procedures that will reduce the risk of falling victim to fraud schemes in the future. Past fraud engagements have resulted in successful recoveries in both civil and criminal actions. Contact our Palm Beach Gardens or Miami offices today to learn more!