Internal Fraud Detection Fraud Can Be Detected

Internal Fraud Detection

Fraud can be detected by deliberate effort through internal control efforts or by coincidence or chance. When companies do not practice strong internal control, it leaves the door open for employees to misappropriate assets without being detected, except by chance. By the time fraud is detected by chance, it could have cost a company millions of dollars in misappropriated assets.

The first coincidence discovered by the magazine company was in the process of a new auditor in an effort to get to know his new company and their accounting codes taking invoices to a vice president responsible for approving payment on them. The very top invoice was a forged signature, and upon evaluation, more invoices were discovered to have contained forged signatures, which is what set up the investigation. According to (Global Economic Crime Survey), 13% of internal fraud is detected by accident, 27% reported fraud in the entertainment and media industry, and 27% reported fraud impacted organizations with over $500,000. Of that, 17% reported financial costs over one million dollars in asset misappropriation.

The second coincidence was discovered by the employee's secretary, who was on the same bowling team and a neighbor to the employee. The employee behavior was different when in office than at the bowling alley. The employee had extravagant behavior buying all the team drinks. When spending $800 on drinks, the secretary questioned about the ability to pay the high price. Even after being told the lie about his father-in-law dieing, no one checked to verify it. According to (Global Economic Crime Survey), suspicious transaction reporting was five percent and 70% believed fraud was committed to maintain living standards. The bowling alley transactions definitely qualified as suspicous transactions, since the employee only made $30,000 a year. And, considering the employee salary, it appears that the motive was to increase living standards.

The third coincidence was when the employee had went on a vacation after no vacation for four years. According to (Global Economic Crime Survey), 18% of fraud is committed by opportunity, 68% is committed by incentive or pressure, and 14% is committed by attitudes and rationalization. If the employee had taken vacations, it would have decreased the opportunity to commit more fraud. The employee was given incentive by having more money to increase living standards and given incentive by attitude and rationalization since it was easy to commit fraud without arousing suspicion. Each time the fraud was committed without detection, it was increased the next time because the employee was not suspected by anyone. The company lossed $1,057,000 over a four-year period. According to (Global Economic Crime Survey), two thirds reported asset misappropriation, which is the biggest way fraud is committed.