Issue 12 April 2011 INFORMATION FOR ORGANISATIONS
An introduction to fraud detection
Fraud detection should form part of an organisation’s overall anti-fraud strategy to identify and stop new or historical fraud at the earliest opportunity. Effective fraud detection saves money and protects businesses and their employees, shareholders and customers. What is fraud detection?
Fraud detection is the identification of actual or potential fraud within an organisation. It relies upon the implementation of appropriate systems and processes to spot the early warning signs of fraud. Fraud detection usually includes a combination of the following techniques: • Proactive (eg. risk assessments) and reactive (eg. responding to reports of fraud). • Manual (eg. spot audits) and automated (eg. specialist data-mining software). It should form part of an organisation’s overall anti-fraud strategy covering the prevention, detection and investigation of fraud.
The key elements of a robust fraud detection strategy include: • Ongoing risk assessments • Staff training and awareness • Fraud reporting mechanisms • Data-mining and analysis • Manual checks and balances • Systems, processes and controls review.
All businesses are vulnerable to fraud. However, the fraud risk varies according to the nature and size of the business and the sector in which it operates. Build a profile of potential frauds that your organisation may be vulnerable to and identify where they might occur. Be aware of new and emerging fraud threats affecting your industry or sector and think about how these might be prevented or detected within your organisation.
Who is responsible?
Every employee has a responsibility for fraud detection: • Board: Setting the tone from the top, governance and fraud risk management. • Management: Implementing policies, controls and processes. • Employees: Keeping an eye out for the warning signs of fraud, and reporting concerns. In some organisations, internal audit plays a key role in fraud detection through evaluating the potential for fraud and how real incidents are managed in order to provide ‘independent assurance on the effectiveness of processes put in place by management to manage the risk of fraud’.*
Staff training and awareness
Educate management and staff about fraud and how to identify the warning signs of common frauds and scams. Include fraud awareness training as part of your induction programme for new joiners, in periodic management briefings and through ongoing staff training sessions. Ensure staff are aware of the procedure to follow in the event of a fraud being discovered or suspected, including how to report it.
Why is fraud detection important?
Even the most comprehensive fraud prevention controls can be circumvented by a determined and skilled fraudster. Fraud detection techniques can help to uncover new fraud in action as well as historical frauds. Effective fraud detection saves money and protects businesses and their employees, shareholders and customers. Promoting the organisation’s detection activities can also act as a deterrent to would-be fraudsters. Other benefits include (but are not limited to): • Reduced exposure to fraudulent activity • Identification of vulnerable employees at risk to fraud • Reduced costs associated with fraud • Refined organisational controls • Improved financial and operational results • Improved shareholder confidence and market position.
Fraud reporting mechanisms
Make it as simple and as straightforward as possible for staff to confidentially report concerns about suspected or actual fraud. Set out whistle-blowing arrangements and/or specify a designated individual(s) to whom staff can report concerns. If a separate whistleblowing policy exists, make sure your staff know about the policy and where to find it. Think about making staff aware of the charity Public Concern at Work (PCaW), which offers free...
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