“There is No Such Thing as a Perfect Fraud. There is Always a Trace Left Behind...”

• Fikret Sebilcioğlu          CFE, CPA, TRACE Anti-Bribery Specialist         
• Managing Partner
• E-mail to Fikret

What is Your Most Effective Method of Detecting Fraud? 

Do you recall the title? Yes, I was inspired from the statement “There is no such thing as a perfect crime. There is always a trace left behind...” Would you say that this statement is too ambitious? There are of course cases of fraud that could not be detected or were revealed years and years later. However, our experience shows that unless there is an exceptional genius or an intricate collusion behind the method of fraud, every fraud leaves traces behind that are possible to identify. This trace might be a colleague accidentally catching another colleague that commits a fraud forging a document, an internal auditor identifying a deleted journal entry through data analysis or looking into the reason why a bank reconciliation does not add up correctly.

Most individuals do not commit a fraud where they think they might be caught. An employee that plans to commit a fraud in a workplace is very well aware that he is risking his career, reputation, and freedom. Therefore, the main pillar of avoiding fraud is increasing the chances of detecting fraud.

The 2016 ACFE (Association of Certified Fraud Examiners) Report to the Nations on Occupational Fraud and Abuse examines 2,410 cases. The way these cases were brought to light is striking. Here are the top 5 most effective detection methods:

• Tips (39%)
• Internal audit (17%)
• Management reviews / reports (13%)
• Coincidence (6%)
• Account reconciliations (6%)

The results show that the message is crystal clear. “Tips” is by far the most effective detection method (as shown in the previous researches conducted by ACFE). “Internal audit” is still important, even more so compared to the previous periods. Management reviews and account reconciliations are also undeniably effective.

“Independent external audit” which is not even included in the top 5 helped organisations detect only 4% of the cases under review. That when even coincidence reveals 6% of cases, independent external audit is only 4% raises questions as to the profession of independent audit from the perspectives of fraud detection. Moreover, many company owners and executives get independent audit service, are assured that their financial statements do not have a significant fraud risk by the auditor and sleep soundly. I guess the above-mentioned finding creates a serious potential for nightmare in their sound sleep.

Considering the detection methods, there are variations based on the size of the company (with above or below 100 employees). For example; in big companies reports and internal audit are more effective in proportion, while management reviews / reports and account reconciliations prove to be more effective in small companies.

I would like to draw your attention to a couple of research findings regarding tips. 52% of tips come from employees, while 48% mainly from third parties. Of such third parties, customers account for 18% and suppliers 10%. This finding is a striking indication that tips are also made from external sources.  

On the other hand, when companies have a hotline mechanism, it is easier to detect a fraud by tips. The ACFE Report reveals that in institutions with a hotline mechanism, 47% of frauds is detected by tips, while in institutions without a proper hotline mechanism, the rate decreases to 28%. In short, a medium that is created via a hotline mechanism and naturally resulting in policies and procedures (which can be named the “speak up” culture) encourages or reinforces employees to report fraud. 

Employees that trust their companies, adopt the codes of ethics and are encouraged to report any conduct that violates the code seems to be the most cost-effective and the most reasonable method of detecting fraud in the medium/long run. Supported by other anti-fraud controls such as internal audit, the effective controls will make employees having the potential to commit a fraud think twice before actually committing it. 

The best medicine against the risk of fraud is early detection and fast action… Do not be late!