Monday, November 2, 2009

Characteristics of Internal Fraud - Employee fraud. Fraud Detection and Prevention through Internal Audits and Internal Controls.

Characteristics of Internal Fraud

Employee fraud falls into at least one of three widely recognized general categories:
1. Asset misappropriation
2. Bribery and corruption
3. Financial statement fraud

Many fraud schemes include components from more than one of these three categories.

When two or more employees collude to commit an internal fraud, the losses to the company are more than four times higher than the losses from a single-person fraud. The losses are dramatically higher when employees collude, because they are able to jointly cover up the fraud. A company with good supervision of employees and cross-checking of work may still fall victim to a fraud scheme if the right employees collude to cover one another's tracks.

This collusion also increases the length of time a fraud scheme may continue without being detected.
Smaller companies are generally hit harder by fraud than larger companies. Their median dollar loss per fraud scheme is higher than in larger companies, and naturally, smaller companies have smaller budgets, which consequently feel an even greater impact from fraud.

Detecting Internal Fraud
34% of frauds are detected through a tip from an employee, vendor, customer, or anonymous person. This supports the idea of having anonymous hotlines available for people to report fraud, which will be discussed further on. If people are willing to report suspected fraud to the company, it makes sense to make it as easy as possible to report the suspicious behavior.

The next most common way to detect internal fraud is by accident. About 25% of frauds are detected this way. An accidental detection may include a phone call routed to the wrong person, who then uncovers the fraud, or a piece of mail that is inadvertently intercepted, or some other chance event that causes an outside party to become aware of fraudulent activities. This statistic about accidental detection is very disturbing to fraud prevention professionals. In spite of all of the anti-fraud resources available to companies and the increased fraud prevention efforts management says are being undertaken, one-fourth of frauds are still discovered by accident.

Following closely behind in the fraud detection spectrum are internal audits and internal controls. Some may be surprised that these methods of detecting fraud end up in third and fourth place, given that they are often considered highly effective methods of preventing fraud. It is quite possible that companies still haven't developed internal controls sufficiently to make them as effective as they might be.



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