September 20, 2021

Not Auditing Is Twice as Effective as Auditing at Catching Fraud

Today, we have an interesting ACFE report that not looking for fraud is more than twice as effective as external audits at detecting internal fraud. From CFO.com:

In the recent past, the Association of Certified Fraud Examiners has described where companies should concentrate their monitoring for employee fraud. In finance departments, for example, a majority of instances of misappropriation of funds or assets occur in the procurement, payment and expense areas. By analyzing transactions in these functional areas, the ACFE has said, businesses can “test for a wide range of employee fraud schemes, as well as bribery and conflicts of interest.”

However, in the 2014 Report to the Nations on Occupational Fraud & Abuse, released Tuesday, the ACFE admits that catching corporate criminals through analyzing transactions or performing some kind of audit is not very effective. For example, the report says, as reported on PropertyCasualty360.com, many companies use external audits, but audits were the primary detection method in only 3 percent of the 1,438 global fraud cases reported by certified fraud examiners. More fraud (7 percent) was detected by accident than by external audits.

Allow that fact to marinate in your brain for a moment. NOT AUDITING is twice as good as AUDITING.

According to the report, snitches are the best at fraud-busting, though, with a whopping 40% of reported fraud cases included in the study discovered due to employee fraud hotlines. Organizations with hotlines in place also experienced frauds that were 41% less costly, and they detected frauds 50% more quickly.

This effectiveness may be credited to the inability of fraudsters to not act shady. More than 90% of fraud perpetrators displayed common behavioral indicators, such as living beyond one’s means (43.8%), having financial difficulties (33%), maintaining an unusually close association with a vendor or customer (21.8%), and exhibiting control issues with an unwillingness to share duties (21.1%), said PropertyCasualty360.com.

Get your paws on the full study here if you're into this sort of stuff.

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