Most common fraud detection method: Employee tips

Very often, advice on preventing embezzlement focuses on establishing strong financial controls. However, your most powerful tool for preventing internal fraud may be your employees themselves, according to data from the Association of Certified Fraud Examiners (ACFE), which identifies employee tips as the most common method of fraud detection since 2002.

According to the ACFE's 2012 Report to the Nations on Occupational Fraud and Abuse, tips led to the initial detection of fraud in 43 percent of the 1,388 cases of worldwide occupational fraud reviewed in the study. Management review and internal audit ranked as a distant second and third, noted the report.

To get the most return on their anti-fraud investment, those running small businesses, such as physician offices, should focus on control mechanisms, such as hotlines, employee education and setting a proper ethical tone within the organization, the ACFE recommended.

Nonetheless, nearly half of the victim organizations studied for the report did not have fraud hotlines in place at the time of the crime, and fewer than 10 percent offered rewards to whistleblowers.

"These low rates indicate that many organizations might not yet realize the importance of proactive efforts to support and encourage tips in order to effectively detect fraud," noted the report.

In addition to facilitating employee tips, the ACFE said that organizations should provide fraud-awareness training for employees and managers, the Society for Human Resource Management reported. At a minimum, these programs should include education of what actions constitute fraud, how fraud harms everyone in the organization and how to report suspicious activity. Management should not only encourage reporting but also adhere to a strong anti-retaliation policy.

Small businesses, such as physician offices, are particularly vulnerable to employee fraud and embezzlement, the report found, adding that the smallest organizations in its study suffered the highest median losses. Overall, nearly half of the fraud victims studied were unable to recover their losses, emphasizing the point that fraud-prevention is critical for all businesses.

To learn more:
- see the post from the Society for Human Resource Management
- read the summary from the ACFE report
- download the full report (.pdf)

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