With audit season upon us, it is important to remember that auditors are required to address “risk of fraud” during the audit process for both businesses and nonprofit organizations. The most common type of fraud is asset misappropriation, occurring in 85% of cases, according to a Global Fraud Study by the Association of Certified Fraud Examiners (ACFE). Financial statement fraud occurred in only 9% of cases.  

Fraud Detection
What is interesting to note in the study is that tips are consistently (and by far) the most common fraud detection method. Over 40% of all cases were detected by a tip – more than twice the rate of any other method. Employees accounted for nearly half of all tips that led to the discovery of fraud.

Organizations with hotlines were much more likely to catch fraud by a tip, and they also experienced frauds that were 41% less costly, and detected frauds 50% more quickly. This is in contrast with the public expectation that the role of auditors is to detect fraud. According to the study, external audits are among the least effective control methods in combating fraud, and were the primary detection method in only 3% of fraud cases.

The most effective fraud detection methods are broken down as follows:

• Tips 42%
• Management review 16%
• Internal audit 14%
• By accident 7%
• Account reconciliation 7%
• Document examination 4%
• External audit 3%
• Others 7%     

Takeaways about Fraud
Some of the conclusions reached as a result of this and previous fraud studies by the ACFE are:

• Fraud is a universal problem for businesses and nonprofits around the globe.
• Small businesses are both disproportionately victimized by fraud and under-protected by anti-fraud controls.
• Many of the most effective anti-fraud controls are being overlooked by a significant portion of organizations.   

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Contact H2R CPA at 412-391-2920 or team@h2rcpa.com to learn more about how we can assist you with putting internal controls in place to prevent fraud or any other Assurance needs you may have. Our team would be pleased to provide a complimentary consultation.