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What are the Methods of Detecting Fraud?

Oct 11th 2018
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Understanding the methods of how to detect fraud, occupational fraud in particular, will help you establish and implement internal controls as well as help you during a fraud investigation. 

This information will also assist you with how you can help others take the steps necessary to minimize the risk and be more proactive in the approach to protect businesses from this crime.

The three primary methods in which fraud can be detected are:

  1. Tips
  2. Internal audit
  3. Management review 

The statistics show that tips compile 40 percent of the most popular methods of detection, internal audit comes in at 15 percent and management review is 13 percent.  The remaining 32 percent of the methods of detection include:

  • Document examination
  • Account reconciliation (not just bank accounts, of course)
  • External audit

and a few others.

Let’s Talk About Tips 

Here, we are talking about someone telling someone else about a fraud they have witnessed. A word from fellow employees or staffers comprises 53 percent of the tips reported that expose the fraudster of their crime.  This statistic makes sense to me since I believe that if someone sees someone committing crime, we are trained to see something and say something. 

If you see a co-worker stealing from the company, the chances of them ratting out the co-worker is high. In my opinion, the majority of people are honest and would not support this type of behavior.

One of the most astonishing statistics is that 21 percent of the tips come from customers. Vested customers, those customers who know the owner and likely have for many years care about the company they do work with. 

Would you ever think a customer would tip off an employee doing things that they shouldn’t be?  I have actually done that for a client of mine. 

I was driving home from an appointment one day and saw a construction van with the client’s name on it at a package store. It was approximately 3:30 in the afternoon. I called the client right away and said “Hey, I wanted you to know that your van is sitting at Ann Marie’s package store.  I just want to be sure you had a job there or if your employee is stopping for some beverages. I definitely wanted to be sure the employee isn’t drinking and driving!” 

He really appreciated that. I am not sure what ended up happening, but I cared about my client, who was the business owner, enough to let him know what I saw, whichever way it turned out and I felt good about my decision.

What About Internal Audit and Management Review?

What is important to note is that most of your small business clients do not have enough manpower or funds to conduct these types of important methods. Because of these two methods of detection being almost absent, the necessity of internal controls are even more critical for those businesses. 

Consider this as your mission to implement some form of “mini-audit plan” for your clients. Make sure you have an engagement letter with disclaimers that it is not a formal audit and you won’t provide any level of assurance. But rather, in those mini-audits, focus on how you can implement internal control in areas of weakness.

Next week we will discuss the characteristics of the businesses most at risk.

Replies (2)

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By PaulChau
Oct 24th 2018 03:34 EDT

It's important to have both internal and external auditing measures in place to make sure that everything is in order isn't it? I would really want to make sure that there are also a number of various check points that need to be verified every time we are looking at the company's accounts. There is no real fail safe though - I mean even MNCs have had money siphoned out from their coffers, but we have to do our due diligence as best as we know how!

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By markgrogan
Oct 24th 2018 23:31 EDT

Usually fraud cases are uncovered during internal audits and internal audits are often carried out when there have been tips apart from being performed during random occasions. When there is the first scale of suspicions, an immediate counter measure needs to be put in place before the situation worsens. Not much can be salvaged if the fraud has escalated for so long without being detected. At the end of the day, the culprit might not even be able to compensate the losses even if it means putting them behind bars.

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