June 22, 2018

The best way to uncover fraud is to use software built specifically for that purpose. But fraud detection software can be expensive and may require major resources to put in place and monitor.

Taking a Closer Look

Here are two examples of employees detecting fraud in the course of using software for their jobs.Example #1: An employee in a carpet manufacturer’s accounts payable department noticed an unusual series of invoices to a local cleaning supplies company. The employee became suspicious because she knew that her employer had been buying its supplies from a different concern for more than five years.

Looking more closely at the situation, she realized that the invoices had been submitted by a colleague whose brother owned an office cleaning-supply business.

The employee notified her manager who conducted an internal audit and determined the invoices were fraudulent. Fortunately, none of the invoices had been processed so the company did not incur a loss.

Example #2: A scheme to defraud Florida taxpayers out of nearly $6 million was thwarted by some vigilant employees at a bank and a road contracting company.

State officials received fake invoices directing them to transfer the money to a bank account controlled by a Lebanese man, rather than to the road contracting company that was supposed to receive the funds.

Bank employees thought the wire transfers looked unusual and brought them to the attention of the bank’s security office. One of the employees had also taken down the make and license plate number of the alleged fraudster’s car. The FBI arrested him the following day and he was charged with wire transfer fraud.

An employee at the road construction company also acted quickly, notifying the state immediately when the money didn’t show up on time.

Lessons learned: Encourage employees who are involved in disbursing funds to exercise professional skepticism. Praise employees for bringing issues to management’s attention. They will not always be correct, but the right culture increases the effectiveness of fraud detection.

An alternative is to leverage your company’s existing technology and resources in ways that will help uncover internal and external crime. Keep in mind that there is a large body of evidence suggesting that corporate fraud is often uncovered by employees.

Here are some tips:

Heighten employee awareness. Identify the areas in your business where employees are most likely to come across suspicious transactions or activities that may indicate fraud. Then, train them to be aware. Provide specific examples so they know what to look for and report.

One area rife with potential for both internal and external crime is your organization’s accounts payable department. Unusually high invoice activity, duplicate payments, vendors with regular patterns of cancelled checks or above-average payments to a supplier could all indicate something is not right. (See right-hand box for examples.)

Develop an action plan. Employees who discover fraud may not know what to do with the information they find. Design and document a policy on how to report suspicious activity and be sure the process can be understood and followed by everyone at the company. Tipster employees should also know that they can remain anonymous during an investigation.

Take inventory. Set up a team to look at existing technology and what your business uses, such as reporting tools, customer relationship management software, and information management systems.

Create exception reports. Using the results of the report inventory, start creating reports that highlight data that falls outside expected parameters. For example, your information management technology could match current data against various fraud scenarios such as payments made on two invoices with the same reference numbers.

Your IT team may be able to configure your company’s current technology to send alert messages or notices to management when suspicious transactions occur.

Some reports can be merged to provide a more detailed look at unusual activity. Consult with your accountant who can teach you the red flags and patterns that often suggest fraud. The exception reports should be kept by your company’s internal audit or fraud department.

Reverse engineer. Use the results of previous fraudulent activity in your industry, or crimes against your own business, to see how fraud may show up in corporate data. Use that information to develop more effective fraud-detection reports.

Assess fraud risks annually. Determine weaknesses that make your business vulnerable to fraud. Brainstorm with management and supervisory staff to discuss possible fraud schemes and scenarios, along with ways to combat them. The assessment will raise the overall awareness of fraud and highlight areas of particular concern.

Using existing technology to detect fraud is a cost-effective solution that many companies often overlook. Once employees are trained in what to look for and the technology is repurposed, the results can be almost immediate.

© 2018