Detection and Prevention of Fraud Schemes

Demystifying Valuation, Economic Damages + Forensic Accounting

Do you worry about the potential for fraud in your company? There is a fairly simple and affordable way to help prevent and detect fraud – through implementation of a “tip line.” Because tip lines encourage and facilitate anonymous reporting, they are a proven fraud deterrent that can be successfully implemented without burdensome effort or expense.

The fraud triangle theory states that those who commit occupational fraud tend to have (1) a perceived financial need; (2) opportunity; and (3) rationalization. The threat of likely detection is one of the most powerful factors in fraud prevention because it all but eliminates the fraudster’s perceived opportunity. According to the 2014 Report to the Nations on Occupational Fraud and Abuse, which contains the findings of a biennial survey conducted by the Association of Certified Fraud Examiners (“ACFE”), the most common detection method in cases of occupational fraud is through tips, with over 42% of cases uncovered through tips.

It is not surprising that employees were the source of almost half of all tips that led to the detection of fraud in the ACFE survey, since the occurrence of fraud can have a negative impact on an organization – including those who work for it. At the same time, there is often a risk of backlash for whistleblowers, which likely explains why a substantial amount of tips were reportedly from anonymous parties (14.6%). The ACFE survey also found that over 21% of tips regarding fraud came from customers, and almost 10% came from vendors. Therefore, it is important that vendors and customers are also aware of options for reporting suspicions of fraud.

The overwhelming evidence in support of tip lines has spawned the development of several third-party tip line options. Tip line companies typically provide anonymous, 365/24/7 access and a variety of means of accessing the tip line. Costs are generally reasonable considering the risk of loss: minimum annual fees range from $500 for up to 100 employees to $2,000 for a cloud-based software solution. Different pricing options frequently exist for not-for-profits. Functionality ranges from companies that simply provide hotlines to those that provide tip lines in addition to a full governance, risk, and compliance program.

A good tip line can help a company defend against lawsuits, provide employees and others with an outlet for reporting ethical misconduct, and emphasize fairness in an organization. Tip lines are one of the most effective tools organizations possess for detecting and preventing fraud, and are well worth the cost of implementation.

By Lynne Bouvea, CPA/ABV/CFF, ASA, CFE