Insights: Article

3 Tips to Stop Fraud at Your Organization

By Doug Cash

November 17, 2017

Five percent of a company’s annual revenues are lost to fraud each year—that’s $3.7 trillion worldwide. While the median loss is $150,000, 23 percent of cases involve losses of greater than $1 million. In 83 percent of fraud cases, the fraud involves asset misappropriation.1

The primary weakness in many fraud cases is lack of internal controls. It is important to be aware of the trends in fraud so your organization can avoid occupational fraud and abuse. The longer a fraud scheme occurs without detection, the greater the financial damage.

A Real-Life Example
Eide Bailly recently assisted a small rural hospital in which we identified internal control weaknesses over their purchasing and inventory function. 

The office manager was responsible for ordering supplies such as diabetic test strips. These test strips were then available for hospital patients to purchase. However, the hospital failed to have a procedure to accurately inventory these test strips.

Eide Bailly was engaged by the hospital due to other concerns related to the office manager. Through a forensic accounting examination, we learned that the office manager was selling test strips on the black market for personal gain. By the end of the scheme, the hospital lost more than $178,000.

Three Ways to Prevent Fraud
Health care organizations should consider the following controls to help prevent and/or detect common fraud schemes: 

  • Use a hotline. One way to stay on top of fraud cases is through a hotline. More than a third—39.1 percent—of fraud cases are detected by a tip line and, in 51.5 percent of cases, employees are the source of the tip. Organizations with a hotline are 50 percent quicker at detecting fraud.1 Hotlines are beneficial for both the employer and the employee due to ease and anonymity.

  • Establish preventative controls. Preventive controls include deterring or preventing unauthorized transactions, requiring proper authorization, and instilling physical safeguards such as locks, keys and passwords.

    Another important preventative control is an inventory control system. Whether this system is manual or technology driven, the desired result should be to keep an accurate inventory count. This is especially important for high-risk items such as test strips.

    By keeping an accurate inventory count, an organization can identify irregular purchases as well as any item being used at an unusually high rate. An organization can then conduct a review to see if this unusual activity is an indication of deeper issues. This can keep someone from ordering large amounts of supplies and selling them for personal gain through common websites such as eBay and Craigslist. In the example of the hospital above, the office manager used the lack of an inventory system to embezzle $178,000.

  • Establish detective controls.  Detective controls include independent checks to ensure that transactions have proper authority and are recorded correctly. For example, rotating job duties, a mandatory vacation requirement, surprise audits, and routine inventory counts are effective detective controls.

Assuring adequate documentation and records are maintained is also an important detective control. Procedures should be implemented to ensure these detective controls are in place.

With appropriate measures in place, you can successfully decrease the risk of fraud in your organization. Believe it or not, most frauds are uncovered by accident. It’s important to remember not to overlook the most obvious signs. If you suspect fraudulent activity, contact a forensic accountant to investigate the matter for the purpose of potential insurance recovery, civil and/or criminal litigation purposes.

1Association of Certified Fraud Examiners 2016 Report to the Nations on Occupational Fraud and Abuse

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