Fraud can be detected through recommendations, accidental discovery, audits, data mining, and hotlines. Companies use internal and external controls, informal methods, and prevention tactics such as screening employees and adopting a code of ethics to reduce the risk of fraud.
The most common method of detecting fraud is through recommendations from people inside or outside a business or organization. Fraud could also be discovered by accident after a customer complains about an invoice, prompting an investigation into accounting practices. Internal and external controls, such as audits, may also uncover fraudulent activity, but this method is not as effective as using a forensic accountant to examine financial statements. Data mining, also called data analysis, uses computer software as a fraud detection tool, which may recognize unusual patterns in financial records.
Some companies provide a hotline or other method that employees, vendors or customers can use if they suspect dishonesty. Some government agencies also rely on fraud detection tips from the public or peers via anonymous information lines. The Association of Certified Fraud Examiners estimates that one-third of all fraud investigations start with information provided through a tip.
Accidental fraud detection can emerge when one employee is absent and another employee discovers a discrepancy in an account. He or she may find differences between documented cash receipts and bank deposits. Fraud could also come to light when an employee becomes suspicious of a co-worker who appears to be living beyond his means.
Most companies include internal and external controls as fraud detection tools. They regularly perform audits and reconcile accounts. Unusual cancellations or frequent fund adjustments could indicate an area that needs looking into. External auditors typically review internal control procedures to determine whether they are effective or need to be changed to reduce the risk of fraud.
Some companies use informal fraud detection methods by tracking employees who may be robbing the company. They may review work performed by an employee with a known legal, financial, or substance abuse problem. Employees who exhibit questionable work ethics, those who perform poorly, and workers who chronically complain about their jobs may be tempted to commit fraud. Another clue that can lead to fraud detection occurs when an employee handling money becomes protective of their duties, refusing to allow another employee access to financial records. These people rarely lose their jobs or take a vacation for fear of getting caught.
Fraud prevention tactics include thorough screening of employees with access to finances or financial reports. Companies could also reduce the risk of fraud by adopting a strict code of ethics that applies to all employees. Teaching workers to recognize unusual activity that might indicate dishonesty is another strategy used by some companies. Providing adequate security of the physical premises protects data and assets from misuse.
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