Employees are your best anti-fraud resource

One of the most powerful tools for fraud detection is right at your fingertips: your employees.

Three times as many frauds (43%) are first uncovered through tips as opposed to those first identified by internal auditors (14%), according to the Association of Certified Fraud Examiners (ACFE). And far more tips—52%—come from employees than any other source.

Tips have been the most frequent means of detecting fraud in every edition of the Report to the Nations, the ACFE’s study of occupational fraud, ACFE research director Mason Wilder told CFO Brew.

It’s not surprising that employee tips are so useful in alerting companies to fraud, Mac Lillard, a certified fraud examiner and senior manager at GRF CPAs & Advisors, told CFO Brew.

“It’s very difficult for someone outside of an organization,” he said, to look at a “particular process or control and know if fraud is taking place.” Employees have “intimate knowledge” of controls and are more likely to notice when something suspicious happens, according to Lillard, who advises organizations on how to set up anti-fraud programs.

Wilder and Lillard said to harness the power of employee tips, companies need to have hotlines or other reporting mechanisms in place —but that’s just step one. They also need robust systems to handle tips that come in, Lillard said. Conducting fraud awareness training can also improve the ROI of whistleblower hotlines, according to Wilder.

Optimize your whistleblower systems: Having a hotline can reduce both the duration and the median losses of frauds by 50%, and 71% of organizations have one in place, the ACFE found.

But to make sure a hotline is effective, test it regularly, Wilder said, and allow anonymous reporting. Provide multiple ways employees can report: Email and web form reporting has outpaced phone reporting as the most popular way tips come in, ACFE data shows. “You’re going to have different generations represented that are going to be more comfortable with different types of communication,” Wilder noted.

Sometimes, employees may be reluctant to report suspicious activity for fear of retaliation or out of concern that they’re mistaken, according to Lillard. Wilder finds the fact that so many frauds are uncovered by tips to be encouraging. “It’s not an easy decision for people to make” in reference to reporting misconduct, he said, “but our data suggests that there’s a lot of employees out there willing to do the right thing.” Having and publicizing a “zero tolerance policy against retaliation,” Lillard said, can also make staff feel more secure when reporting.

Have a process in place to handle tips before you need one, Lillard said, regardless of your organization’s size or complexity. Large companies may have internal audit or even dedicated fraud teams that can assess tips; other organizations might want to work with a third-party provider or buy software to process tips. But even small companies, he said, should define their process: Not just who employees should report to but also factors such as who investigates claims, where documentation will be stored, who will have access to it, and so on.

Fraud awareness training can pay off: Though fraud awareness training can seem like a “check off the box” kind of exercise, it actually offers considerable return on investment, according to Wilder. Employees who’ve had fraud training are twice as likely to leave tips as those who haven’t, the ACFE found. And fraud training reduces the financial impact of a fraud by 47%–50%, and the duration of a fraud by 37%–40%.

Wilder said fraud training makes employees “aware of how fraud can occur, what it can look like, and what they should do when they encounter suspicious behavior.” But equally important is the cultural change it can affect. It shows employees “that the organization does take fraud seriously, and it’s actively looking to detect and prevent it,” Wilder said. “That is going to serve as a deterrent for people.”

Fraud awareness training can be an “easy control to put in place,” Wilder said, and it “does not have to be super complicated [or] take a long time” or pose a burden on employees. In some cases, it can be as simple as a 30-minute video once a year or quarter. Wilder suggests conducting a fraud risk assessment and targeting the training toward departments where the risk is greater.

Face your fraud risk: Some organizations don’t like to discuss fraud openly, Wilder said, out of concern that it will give employees ideas about how to conduct fraud. But this, he says, is a mistake. “Fraud risk,” he said, “is a universal issue” that organizations of every size in every region and industry need to acknowledge.

“The more up-front you are about it, and the more you communicate with your employees about the organization taking it seriously, the better position you’re going to be in to prevent and detect it,” he said.

Interested in connecting with the industry's leading CFOs about how to future proof for tomorrow? Come to our May 2 IRL event in NYC. Click here for tickets.