June 28, 2017

Preventing Fraud: 5 Things You Should Do Now

By Bridgepoint Consulting

FraudDid you know that fraud is on the rise in America, and that oftentimes it is one of the causes for company failures? In a May 2016 Credit Infocenter article on the topic, the Department of Justice estimated that one out of every 10 bankruptcy filings have an element of fraud. Furthermore, roughly 25 percent of cases were found to contain “material misstatements of income or expenditures.”

In its 2015-16 report on fraud, The Economist Intelligence Unit, commissioned by Kroll, surveyed senior global executives, and discovered that three-quarters (75%) of respondent companies have fallen victim to a fraud incident within the past year—an increase of 14 percent from only three years ago. Additionally, the number of businesses suffering a financial loss due to fraud has increased from 64 percent in the previous survey period to 69 percent this year.


  • Identifying and proving fraud is difficult. Because records will likely be unavailable or incomplete, forensic investigators must have a keen eye to be able to identify deceptive financial activity. In many cases, the signs for fraud are not obvious and the paper trail is limited. It’s critical to spot common red-flags signs of internal fraud schemes. But the first step is knowing where to look.

Related: How to Use a General Ledger to Find (and Stop) Fraud

  • Fraud triangleThe Cressey “fraud triangle.” Individuals who perpetrate fraud possess opportunity, incentive and rationalization — three essentials for the crime to occur. When an individual with high-level access to monies begins to rationalize his actions against perceived financial hardship, entitlement or the belief that he can act without detection or punishment, conditions are ripe for fraud.
  • Resources are lacking to catch the bad guys. When Congress revised the Bankruptcy Code in 2005, it instituted insolvency watchdogs to uncover fraud by auditing consumer debtors – audits that these watchdogs can no longer afford. The US Trustee program, the arm of the Department of Justice which oversees corporate and consumer bankruptcy filings, said in 2013 that it had indefinitely suspended the auditing process, “due to budgetary constraints.”
  • Bankruptcy fraud is not frequently prosecuted. According to the U.S. Department of Justice, out of the more than 2,000 criminal referrals made during 2014, 65 percent remained under investigation 12 months later, and less than 1 in 200 — only 10! — resulted in formal charges. Federal attorneys will take a slam-dunk case, which are few and far between. For a case to get to court, it must meet certain fiscal or high-profile criteria.


Although hard to predict today, the current administration’s federal hiring freeze may limit agents and lead to fewer fraud recoveries. Ultimately, eliminating fraud relies on decisive action by companies to proactively prevent fraudulent activity and educate employees. Management must take decisive action.


1. Learn to recognize those at higher risk

Study the warning signs to enable early identification of common perpetrators of fraud. They are often long-time employees, well-liked and trusted. Worse, they may also be a relative or close childhood friend or company principal(s).

According to the Association of Certified Fraud Examiners’ (ACFE) 2016 Global Fraud Study:

  • Fraud will originate primarily within accounting, operations, sales, upper management, customer service, purchasing and finance departments. In fact, the data revealed that more occupational frauds originated in the accounting department (16.6%) than in any other business unit.
  • The higher the perpetrator’s authority, the greater the losses will be. For example, the median loss in a scheme committed by an owner/executive was $703,000. This was more than four times higher than the median loss caused by managers ($173,000) and nearly 11 times higher than the loss caused by employees ($65,000).
  • The more individuals involved in an occupational fraud scheme, the higher losses tended to be.
  • Male fraudsters outnumbered females by a 2 to 1 ratio.

Surprisingly, some of the most trusted employees are the ones that end up committing fraud. In many cases, these professionals have a limited segregation of duties, are often given many responsibilities and trusted with so much, allowing them opportunities to commit fraud and conceal it effectively.

For example, a woman who owned a home construction company had her best, most trusted friend work for her in the accounting department. She had authority to issue checks, sign checks, record the checks and reconcile the bank accounts. She stole two million dollars from her “dearest” friend.

2. Recruit and retain more competent, ethical talent

Make a conscious effort to recruit talent with a strong set of ethics and consider having your candidates perform an ethics test before hiring them.

  • Perform background checks on all employees and be sure you check for more than just criminal records.
  • Look for warning signs: Does the employee have bank liens, prior bankruptcy filings or other such anomalies that may demonstrate a potential financial hardship and incentive for the employee to steal?
  • Establish written rules of ethics and ensure that all employees receive mandatory training on an annual basis. Also, revisit these standards each year to promote compliance.

3. Increase anti-fraud controls in your business

ACFE surveys consistently demonstrate that the organizations that implement common anti-fraud controls — including job rotation, surprise audits, risk assessments, fraud training, codes of conduct, etc., experience considerably lower losses and time-to-detection than organizations lacking these practices. In addition, setting up a whistleblower hotline is a small investment that can bring to light all sorts of unethical behavior if the leads are followed appropriately.

For example, one of our former clients implemented an ethics policy, training and hotline within their organization. This resulted in a whistleblower tip that led to extensive allegations of kickbacks and false billings. Our clients’ efforts not only promoted fraud awareness and intolerance, the hotline helped uncover rampant unethical behavior among several employees.

To optimize timely prevention or detection of fraud, it’s important to establish rigorous governance processes, create and reiterate visible anti-fraud culture, establish regular risk-assessment procedures, and take swift action in response to fraud allegations, including actions against those involved.

For example, a large school district we worked with performed a fraud risk assessment in one of its departments and discovered several control weaknesses. It implemented new controls and a few months later, because of these new controls, discovered a large embezzlement scheme resulting in the firing of an employee and identification of the loss of hundreds of thousands of dollars.

4. Get the word out to millennials

Now entering their prime working years, the millennial generation has been described as unusually narcissistic. These roughly 92 million Americans born between 1980 and 2000 make up about 40 percent of the US population. Their expectations and priorities differ significantly from those who came before.

With this generation, our culture has produced a highly educated demographic that is more tech savvy and more accepting of information without confirmation, yet not as well-versed in financial management as “Generation X” or “Baby Boomers.” Millennials have tendencies that could lead them to approach workplace decisions differently. Thus, fraud investigators will need to evolve fact-finding processes to mitigate risks with this group.

When it comes time for millennials to assume the primary roles in the American labor force, will this group understand ethics and fraud the same way previous generations did? And will investigators of fraud during that same time be able to use the classical methods of detection?

5. Establish tone at the top

Establish clear tone, from the Board and C-level down, that your organization will not tolerate fraud. Perception is reality: When management and staff have been reminded of your zero tolerance policies, they will follow your lead.

We worked for a Fortune 500 organization that performed an audit of employee expenses, resulting in the identification of significant waste and abuse at the director level. We discovered that photo editing software was being used to change amounts and details of receipts and the fraudsters submitted the same receipt for multiple expense reports. When brought to the attention of management, we were told the directors were “off limits.” This is an example of poor “tone at the top.”


Fraud risks are higher than ever due to technology access, lack of internal controls and fraud detection challenges. With ongoing diligence and awareness, you can effectively identify the warning signs and reduce fraudulent behavior before it negatively impacts your organization. And it never hurts to ask for help. Enlisting a consultant can help you to effectively detect fraud and other suspicious activity before it’s too late. Bridgepoint Consulting leverages forensic data analytics, a proven methodology that assists in identifying the highest risks of fraud, abuse and waste. Explore our Fraud and Forensic services or Contact us today to schedule your free consultation.


About Bridgepoint Consulting

Bridgepoint Consulting is a leading management consulting firm that offers a full suite of services and solutions to help companies navigate the complexities of growth and change. We work with the C-Suite—with a focus on finance, risk and technology leaders—to provide strategic resources and support critical business transitions. Learn more about our services here.

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