Sensing Fraud? Go With Your Gut

Everyone has heard the phrase “Go With Your Gut.” When something doesn’t feel right, it often isn’t. In many of my past fraud investigations owners, board members, vendors, customers, and employees often tell me months or years after the fraud is discovered that something didn’t feel right to them either before or during the fraud event. Different personality types listen to their emotions more than others. Accountants are probably among the worst individuals at ignoring their emotions. We rarely let emotion control our decisions. We let the numbers do the talking. We stay with the facts.

Everyone in the organization has a responsibility to report fraud, and that should include reporting someone’s gut feeling or initial instinct. If your lunch smells bad, it often is. Anonymous hotlines are a great way to allow employees to share their concerns while protecting the employee’s identity. Awareness of the hotline, what management expects from employees, and the hotline are very important to a successful fraud prevention program.

Annual Fraud Trends

The Association of Certified Fraud Examiners (ACFE) 2016 Report to the Nation’s survey had tips (37%), being the highest detection method followed by management review (14.3%). Of the tips reported more than 40% of them came from non-employees such as customers and vendors. It also showed that most small organizations do not have a reporting hotline (25.7%), while many larger organizations do (74.1%).

Organizations can give themselves the ability to detect fraud in its early stages by instituting an anonymous fraud hotline, and making employees aware that their initial instincts about a situation are important for the detection of fraud. The median loss according to the ACFE study was $150,000 per fraud incident. The median duration of a fraud event was 12 months for employees, 18 months for managers, and 24 months for owners/executives. In my experience the fraud duration has often been several years. Organizations cannot afford to continue doing business without a fraud hotline.

If your organization would like to continue a discussion on this topic, or other fraud related topics, please email me at dhammarberg@macpas.com.