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34.8 Fraud Detection and Prevention

Overview​

Fraud detection and prevention are critical for protecting business assets. Understanding common fraud types, warning signs, and prevention measures helps businesses protect themselves from fraud losses.

Common Fraud Types​

Asset Misappropriation​

Asset Misappropriation:

  • Cash theft: Stealing cash
  • Inventory theft: Stealing inventory
  • Expense fraud: Falsifying expenses
  • Payroll fraud: Falsifying payroll
  • Check fraud: Forging or altering checks

Financial Statement Fraud​

Financial Statement Fraud:

  • Revenue manipulation: Falsifying revenue
  • Expense manipulation: Falsifying expenses
  • Asset overstatement: Overstating assets
  • Liability understatement: Understating liabilities
  • Misleading disclosures: False disclosures

Corruption​

Corruption:

  • Bribery: Accepting or offering bribes
  • Conflict of interest: Undisclosed conflicts
  • Kickbacks: Receiving kickbacks
  • Extortion: Demanding payments
  • Illegal gratuities: Illegal gifts

Fraud Warning Signs​

Red Flags​

Common Red Flags:

  • Lifestyle changes: Employee lifestyle exceeds income
  • Behavioral changes: Unusual behavior
  • Financial pressure: Personal financial problems
  • Control weaknesses: Weak internal controls
  • Unusual transactions: Unusual or unexplained transactions

Operational Red Flags​

Operational Warning Signs:

  • Missing documentation: Missing invoices, receipts
  • Unexplained discrepancies: Unexplained differences
  • Excessive overtime: Excessive overtime claims
  • Poor record keeping: Inadequate documentation
  • Resistance to review: Resistance to controls or reviews

Prevention Measures​

Preventive Controls​

Prevention:

  • Strong internal controls
  • Segregation of duties
  • Authorization procedures
  • Physical controls
  • Access controls

Detective Controls​

Detection:

  • Regular reconciliations
  • Surprise audits
  • Transaction reviews
  • Exception reports
  • Monitoring

Fraud Response​

When Fraud is Detected​

Response Steps:

  1. Document evidence
  2. Secure evidence
  3. Notify management
  4. Investigate thoroughly
  5. Take appropriate action
  6. Report if required
  7. Strengthen controls

Investigation​

Investigation:

  • Preserve evidence
  • Interview relevant parties
  • Review documentation
  • Calculate losses
  • Document findings
  • Take corrective action

Luxembourg Compliance Note​

Legal Requirements:

  • Fraud prevention: Legal obligation to prevent fraud
  • Fraud reporting: May need to report fraud
  • Investigation: Should investigate suspected fraud
  • Documentation: Document fraud and response
  • Controls: Must have controls to prevent fraud

Best Practices:

  • Prevention: Focus on prevention
  • Detection: Implement detection measures
  • Response: Have fraud response plan
  • Training: Train staff on fraud awareness
  • Culture: Promote ethical culture

Think It Through​

Artisan Boulangerie suspects an employee may be stealing cash. What steps should they take? How should they investigate?

Concepts in Practice​

Fraud Prevention Example

TechLux Solutions fraud prevention:

Preventive Controls:

  • Segregation of duties
  • Authorization requirements
  • Physical controls
  • Access controls
  • Regular reviews

Detective Controls:

  • Monthly bank reconciliation
  • Surprise cash counts
  • Vendor statement reconciliation
  • Transaction reviews
  • Exception reports

Fraud Awareness:

  • Staff training on fraud
  • Code of conduct
  • Whistleblower policy
  • Regular communication
  • Ethical culture

Response Plan:

  • Documented fraud response procedures
  • Investigation procedures
  • Reporting procedures
  • Corrective action procedures
  • Control improvement

Result: Strong fraud prevention, effective detection, prepared response, reduced fraud risk.