Top 4 Internal Controls That Reduce Fraud Losses

The ACFE’s 2020 Report to the Nations not only identifies the top anti-fraud controls that can help protect organizations, but also illustrates what can happen when controls are weak or altogether missing.

By: ACFE Staff

Proactive anti-fraud controls play a key role in an organization’s fight against fraud. While the presence of these mechanisms alone does not ensure that all fraud will be prevented, management’s commitment to and investment in targeted prevention and detection measures send a clear message to employees, vendors, customers and others about the organization’s anti-fraud stance. But what happens when controls are not present? What happens when budget cuts and shifting roles mean that some controls are overlooked or take a back seat to revenue and survival?

The ACFE’s 2020 Report to the Nations not only identifies the top anti-fraud controls that can help protect organizations, but also illustrates what can happen when controls are weak or altogether missing.

To help organizations understand the potential impact of various controls, we compared the median losses and median durations of the frauds in our study based on whether each specific control was present at the victim organization during the fraud’s occurrence. For every control examined, organizations that had the control in place experienced smaller fraud losses and detected frauds more quickly than organizations lacking that control.

Below are the top four internal controls that reduce fraud losses and can improve detection:

1. A robust code of conduct.
2. A strong internal audit department.
3. Management certifications of financial statements.
4. Management reviews of internal controls, processes, accounts or transactions.

These four anti-fraud controls were associated with a 50% or greater reduction in both fraud losses and fraud duration. Internal audits and management reviews are both mechanisms that can be used to actively look for fraud, so their correlation with reduced fraud losses and duration stands to reason. In contrast, codes of conduct and management certifications of financial statements are less directly tied to fraud detection, but both mechanisms likely help increase the perception of detection and form the foundation for a holistic anti-fraud culture.

With fraud on the rise due to the economic downturn and global pandemic, now is the time to invest in anti-fraud controls; not ignore them. Your bottom line depends on it.

You can find more information about anti-fraud controls and so much more in the 2020 Report to the Nations.