According to the Association of Certified Fraud Examiners’ 2022 Report to the Nations, tips are the most common fraud detection method, accounting for 42% of cases studied by the ACFE. In these cases, 55% of tips came from employees, making them the top resource for fraud detection. As this study demonstrates, employees play a vital role in detecting and reporting fraud. Providing employees with fraud detection and prevention training and methods for reporting suspicious activity allows you to maximize the benefits of a conscientious team. In the following, we will discuss the key components of an effective fraud detection and prevention training program.
Even though most employees have heard the word “fraud” used from time to time, many are not fully aware of the potential for fraud to occur within their own workplace. According the ACFE insights article, “Prevent Fraud Before It Happens: How to Train Employees to Be Fraud Detectors,” by Michele L. Creek-Tatom, “A comprehensive fraud awareness training should include basic information to help your employees identify when something isn’t right. That basic information is the what/how, the who, and the why people commit fraud.”
When explaining the “what and how” of fraud, it is important to focus on the types of fraud that are most likely to occur within your organization. Illustrate what each type of fraud might look like so that employees are able to detect warning signs. Remember that the focus of defining the “what and how” of fraud should be practical – instead of relying heavily on terminology and statistics, focus on what employees are likely to see when fraud occurs.
Defining who is likely to commit fraud is an important part of awareness training because those who become fraudsters tend to do so as a surprise to others. For example, the ACFE’s 2022 Report to the Nations found that 65% of fraudsters had at least one university degree. 87% of fraudsters had no prior fraud charges or convictions, and 83% had no prior record of punishment or termination for fraud-related conduct. Furthermore, it is important to highlight the risk factors associated with those who commit fraud. According to the ACFE, some common risk factors include living beyond one’s means, financial difficulties, unusually close association with vendors/customers, control issues, and irritability, suspiciousness, or defensiveness. Highlighting the many ways in which fraudsters tend to blend in with those around them, while also pointing out risk factors, allows employees to sharpen their senses.
Finally, discussing the “why” of fraud allows employees to understand that seemingly honest people have the potential to commit fraud under certain circumstances. The Fraud Triangle is a helpful tool for explaining why fraud occurs. The idea behind the Fraud Triangle is that people are most likely to commit fraud when there is a combination of opportunity, pressure, and ability for the perpetrator to rationalize his/her behavior.
Real Life Examples and Consequences:
In the aforementioned ACFE article, Creek-Tatom discusses the importance of including case studies and defining how fraud directly impacts all employees. She writes, “Cases external to the company that may align with the business are helpful, but we have found the most powerful message comes from sharing actual cases from within the organization.” When doing so, individuals involved should remain anonymous, and details that would lead to a guessing game of who was involved should be left out. The purpose of sharing real fraud cases from within your organization is to demonstrate that it really can and has occurred. In addition to sharing real examples of fraud, Creek-Tatom advises that “One of the most powerful elements of training is describing how fraud impacts the employee directly.” Importantly, fraud is not a victimless crime. In addition to hurting business owners, fraud can cause innocent employees to lose benefits, receive lower compensation, or even lose their job if a company goes under. When employees understand the personal consequences of fraud, they are more likely to care about fraud prevention.
Call to Action:
Finally, it is imperative that fraud detection and prevention training includes a call to action – what must employees do with the knowledge and awareness of fraud that they have been given? The Journal of Accountancy article, “6 ways to make the entire organization care about anti-fraud efforts,” by Andrew Kenney, focuses on tangible steps for combating fraud in the workplace. In the article, Kenney shares the ideas of John Hall, CPA and presenter at the 2021 AICPA & CIMA Corporate Finance and Controllers Conference in Las Vegas. Hall explains that he often works with people who say that they didn’t know about their organization’s anti-fraud policies and controls. In fact, he shares that in 90% of the fraud cases he has seen, he has found flawed or inadequate human execution of controls to be the root cause.
To combat the disconnect between fraud awareness and the actual use of preventative practices, Hall recommends that training focuses on what to do in the moments where employees must enact anti-fraud controls. Hall also recommends creating written policies that “call on employees to help fight fraud and corruption.” Training should define controls that employees are responsible for executing, as well as why they are necessary. Without explanations of why certain procedures are necessary, they may be skipped for appearing unnecessary or inefficient. Furthermore, employers need to call on employees to report suspicious activity. To encourage employees to speak up, employers must provide a clearly defined path for reporting fraudulent and unethical behavior. Employees should be informed of tools and measures, such as an independent hotline plus confidentiality and anti-retaliation policies, should they need to come forward with information.
In summary, employees are your number one asset for fraud detection and prevention, accounting for most tips that uncovered fraud schemes in 2022. Providing fraud detection and prevention training empowers employees with the knowledge and skills necessary for uncovering fraud in the workplace. This is best accomplished with training that incorporates fraud awareness, real life examples and consequences, plus a call to action.
Want to know more on how to prevent fraud? See our article here.