Thursday, September 04, 2008

ACFE: How Fraud Gets Caught

The Association of Certified Fraud Examiners (ACFE) investigated almost 1000 fraud cases between January 2006 and February 2008. The ACFE found that fraud hotlines were particularly helpful with 216/417 cases (where hotlines existed) being caught via hotline tip. Hotlines were considered particularly useful when top executives were involved, in effect because of the reduced risk of workplace reprisal. ACFE estimated that nearly $1 trillion or 7% of GNP in revenues have been lost to fraud. Other ACFE findings: median fraud was $175,000 with a quarter involving $1 million or more; the average fraud lifespan exceeded one year; accounting departments and top management should not be above suspicion when it comes to fraud; most fraudsters had no previous record; small businesses were particularly susceptible and tips were more effective at detecting frauds than audits or internal controls.

The ACFE report provides extremely sobering news; though probably not surprising to the Sam Antars of the world. Some proposed ideas to improve these results (note: some of these fall in the brainstorming category): install hotlines where employees can be rewarded for catching fraud without fear of workplace reprisal; work to reduce the traditional stigma associated with whistleblowing as long as the whistleblowing is done in good faith; monitor internal control systems to make sure that they are not only in place but in use; insure that an internal audit function is in place (unless the business is too small to afford it) and that IA reports to at least the board of directors (preferably an audit committee of nonmanagement directors) to assure maximum IA independence); ask for external auditors to conduct an review of internal controls for companies where an audit is not required by PCAOB; work with insurance companies (which frequently have experience with fraud in general)for ideas on fraud detection; make sure that external auditors insist on answers for management overrides of internal controls; absolutely insure that all audit program steps associated with internal control and fraud detection have unquestionably been addressed and send external auditors to continuing education on foresnic accounting.


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