What Are the Different Methods of Fraud Detection?

The most common method of fraud detection comes through tips from people inside or outside a company or organization. Fraud might also be discovered by accident after a client complains about a bill, prompting an investigation into accounting practices. Internal and external controls, such as audits, might also uncover fraudulent activity, but this method is not as effective as employing a forensic accountant to scrutinize financial statements. Data mining, also called data analysis, uses computer software as a tool for fraud detection, which might recognize unusual patterns in financial records.

Some firms provide a hotline or other method that employees, vendors, or customers can use if they suspect dishonesty. Some government agencies also rely on fraud detection tips from the public or coworkers through anonymous information lines. The Association of Certified Fraud Examiners estimates that one-third of all fraud investigations begin with information provided via a tip.

Accidental fraud detection may surface when an employee is absent and another employee discovers a discrepancy in an account. He or she might find differences between documented cash receipts and bank deposits. Fraud might also come to light when an employee becomes suspicious about a coworker who seems to live beyond his or her means.

Most companies include internal and external controls as fraud detection tools. They regularly perform audits and reconcile accounts. Unusual write-offs or frequent adjustments in funds might point to an area that needs scrutiny. Outside auditors typically examine internal control procedures to determine if they are effective or need changes to reduce the risk of fraud.

Some firms use informal methods of fraud detection by monitoring employees who might steal from the company. They may examine work performed by an employee with known legal, financial, or substance abuse problems. Employees who exhibit questionable work ethics, those who perform poorly, and workers who chronically complain about their jobs might be tempted to commit fraud. Another clue that may lead to fraud detection occurs when an employee who handles money becomes protective of his or her duties, refusing to allow another employee access to financial documents. Such people rarely miss work or take a vacation for fear of discovery.

Fraud prevention tactics include careful screening of employees with access to finances or financial reports. Companies might also reduce the risk of fraud by adopting a strict code of ethics applicable to all employees. Teaching workers to recognize unusual activity that might point to dishonesty represents another strategy used by some firms. Providing adequate security of physical premises protects data and assets from misuse.