Proactive Fraud Detection: The Truth Is in the Transactions

Occupational fraud seems to be a hot topic these days. Perhaps it's because so much of it seems to be going on, or maybe it's because various regulatory bodies, such as the Securities and Exchange Commission (SEC) and Department of Justice (DOJ), have chosen to focus their attention on anti-fraud legislation as a means of getting tough on illegal business practices.

Last year alone, enforcement of the Foreign Corrupt Practices Act (FCPA) resulted in approximately $1.4 billion in combined fines and penalties being levied. But then again, news about egregious acts of fraud is just about as common as the weather report.

It seems that no matter what is going on, be that economic downturn or periods of recovery, someone out there seems to be seeking personal gain or enrichment through acts of fraud. As a result, there is a fair bit of talk about fraud education programs and “whistle blower” hot-lines. While useful and necessary elements in a comprehensive anti-fraud program, it is by definition reactionary.

It is generally believed that fraudsters commit their acts because they do not think that they will be caught. Adding new rules or as in the case of the FCPA, enforcing old ones or encouraging whistle-blowers will not, in my opinion, cause fraudsters to stop. What can influence the outcome more effectively is putting proactive detective measures in place and letting everyone know that you are monitoring the business and actively seeking out the tell-tale signs of fraudulent activity.

By detective measures, I mean using data analysis or more specifically audit analytics technology to seek out indicators of fraud in an organization's transactional data. When someone commits an act of fraud, there is invariably a record of their actions or an indicator of their deceit.

It may manifest itself as a manual journal entry made late at night on or near a period end close date. It could be duplicate invoices submitted by a seldom used supplier. Alternatively, it could be an address for a vendor in your vendor master file that matches the address of one of your employees. Perhaps it's missing data – such as a vendor with a PO Box for an address and no telephone number. Maybe it's as simple as someone buying stereos, groceries or other personal items on their corporate Procurement Card. Whatever it is, by looking to your organization's data, you can see evidence or indicators of what has actually gone on. The truth is in the transactions, and all one needs to do is to look there and ask the right questions.

When these measures are applied on a continual basis (continuous auditing or monitoring) – and everyone is aware of their existence – detective measures become preventative in nature. Once it's known that activities are being monitored 24/7, it creates an environment where the risk of getting caught outweighs the possible gains of committing fraud.

This idea isn't new, as it is often cited in reports, articles, and in the Fraud Prevention Checklist contained in the Association of Certified Fraud Examiners 2010 Report to the Nations: “Is continuous auditing software used to detect fraud and, if so, has the use of such software been made known throughout the organization?”

Applying data analysis to fraud detection can happen in incremental phases. It doesn't mean doing nothing one day and implementing a full suite of fraud detection tests the next day. In my experience, the successful organizations, who are leveraging data analysis technology to the fullest, are the ones that have established a good solid foundation in people, processes and technology to begin with.

The effective use of data analysis technology is a precursor for continuous auditing and monitoring. Competency in understanding key business processes and being able to analyze and interpret the data that reflects those activities is a fundamental requirement.

Every organization is at risk of being exploited by fraudsters. Leveraging the power of data analysis – as a detective and preventative measure – is what leading organizations are doing to safeguard themselves against the financial, reputational and psychological impacts of fraud. The truth is in the transactions. One just has to know how and where to look for them.