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Tuesday: What Can Be Done to Find Potential Fraud?

The speed and method of fraud detection have a significant impact on the size of a fraud. Improving proactive techniques and regularly training employees on fraud detection help reduce the duration and lower losses. Being proactive will also improve fraud prevention as the perception that fraud will be detected deters it from happening. Today we discuss:

  • How occupational fraud is detected.
  • How the detection method relates to fraud loss and duration.
  • What red flags of fraud are and how they get noticed.

Occupational Fraud Detection

Knowing the most common methods to discover fraud helps agencies implement strong controls and train on effectively detecting fraud. Despite the increasing number of advanced fraud detection techniques, tips continue to be the most common way fraud is discovered. The top three ways are:

  • Tips
  • Internal audit
  • Management review

Although some agencies in the executive branch have internal audit functions, most do not, and generally this method is not used primarily to discover fraud. The table below magnifies the importance of employee tips and thorough management oversight techniques to find potential fraud within a year on average.

Table 1: Detection, detection method, average duration, and fraud loss

Detection

Detection Method

Average Fraud Duration and Loss

External Audit

Active or passive detection

20 months; $219,000

Notification by law enforcement

Passive detection

18 months; $500,000

Document examination

Active detection

12 months; $200,000

Tip

Active or passive detection

12 months; $117,000

Internal Audit

Active detection

12 months; $108,000

Account reconciliation

Active detection

8 months; $74,000

Automated transaction/data monitoring

Active detection

6 months; $50,000


Perpetrators and Red Flags

A person engaging in occupational fraud will often display certain behavioral traits that may indicate fraud, known in the fraud world as “red flags.” These red flags are often present before fraud is detected, and fraudsters display at least one of these behaviors 85% of the time. The top 8 red flags by percentage of occurance are:

  • Living beyond means (39%)
  • Financial difficulties (25%)
  • Unusually close association with vendor/customer (20%)
  • Control issues, unwillingness to share duties (13%)
  • Irritability, suspiciousness, or defensiveness (12%)
  • Bullying or intimidation (12%)
  • Divorce/family problems (11%)
  • “Wheeler-dealer” attitude (10%)

Short Video Clips

Review the videos for additional information on fraud detection and negative effects of weak internal controls.

Table 2: Short video clips, video length, and video description

Video Sequence

Video Length

Video Link and Description of Video

V 2.1

1:49

What Does Fraud Mean to You?

V 2.2

1:46

How Internal Control Weaknesses Contribute to Fraud

V 2.3

1:50

What Does a Fraudster Look Like?

V 2.4

8:20

Auditing for Fraud Detection?


About ICA

Minnesota Management and Budget’s Internal Control and Accountability Unit (ICA) offers resources, training, and consultation for executive agencies to prioritize and document their internal control systems. The unit offers content for Fraud Awareness and Prevention Week for a tenth consecutive year, aligning with the Associated Certified Fraud Examiners (ACFE) annual International Fraud Awareness Week.

Resources: Occupational Fraud 2022: A Report to the Nations.

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