When reading the annual statements of an organisation and the usually clean accompanying external auditors’ report, one tends to believe that there has been no fraud that year. The typical reaction is “excellent, nothing bad here.” But be warned, positive audit reports are anything but “clean bills of health.” If, by “fraud and corruption,” we are talking about any type of deliberate and harmful activity done by a handful of unethical suppliers, customers, consultants and agents, criminals, and in a few cases dishonest employees, then we know that being “fraud-free” is wishful thinking at best.  

Having dedicated my professional life to finding fraud early in organisations across the world for over 20 years and teaching thousands of people how to do it and watch them succeed, it is clear to me that that the people who find fraud best, and deal with it expediently and responsibly, are drawn from the large majority of decent and honest people who are working within organisations. Whatever their position in the organisation, it is people inside the organisation who spot fraud first every time. I’m not talking about fraud specialists, I’m referring to anyone who is passionate about defending their own organisation against the dark forces of fraud and corruption, and who has a keen eye for detail. The unsung heroes and heroines (“Fraud Detectives” as I like to call them) tend to succeed best when they can work in teams and have the support of management. 

When it comes to finding fraud early, that leaves the external auditors as rank outsiders at best. We should not be looking to them to lead the way nor should we be blaming them either. The way most people describe fraud and corruption today, combined with the direction that the audit profession is headed in, it’s just not on their radar.

Perhaps 50 years ago when organisations were rather less complicated, and an audit entailed a meticulous going over with a fine toothcomb, there was a much bigger chance that fraud would be found. But we should remember that today it is not even the responsibility of external auditors to discover the kind of frauds mentioned above. Some suppliers will always cheat us, customers may do unethical things, bribes can happen, consultants and advisors may behave in disagreeable ways, and front companies will pop up in all sorts of business deals. Most of the time, these activities will result in some form of cost to the organisation, be it obvious, such as loss of money or value or a little subtler such damage to reputation or the organisation’s culture.   Since the chance of discovery is so low, these costs will simply be recorded in the accounts, eventually, and of course will be rubber stamped as actual costs by an audit report.   What the auditor will not normally point out is that the costs were caused by someone’s unethical behaviour…i.e. fraud and could have been avoided.

Thankfully today, the task of finding fraud early and dealing with it effectively does not need to be relegated to someone else whether they be whistle blowers, regulators, auditors or the media. We are fortunate that information flows more transparently than ever before, giving a much wider group of people working in organisations working together to spot the early warning signs.  People working in organisations are not stupid, they can spot fraud and corruption if they are given the chance to do so, especially if management realise that no one else on the outside is doing that job for them.

I believe that fraud detection should be open to everyone who feels they want to do it responsibly. If it is only left to the growing army of specialists, not to mention auditors, then history already tells us things are going to get worse. 

Fraud and corruption is a bit like litter. Litter is often everywhere, and we can choose to see it, or we can ignore it. Most of us see little and think about picking it up and disposing it at a nearby trash can. Can you imagine how unnecessarily complex things would be if spotting and disposing of litter became the protected turf of a group of “highly-trained” specialists? As I like to think “Anybody can be a Fraud Detective.”  Or more simply put, like the phrase “anybody can cook”, almost anybody can find fraud.  You just need guidance and inspiration and to start off with, some well tried and tested recipes. 

This is part one, in a three-part series on identifying fraud. Part two will be a recipe for you to use to spot the few greedy and arrogant suppliers in our midst, selected from the recipes which are covered as part of select MISTI fraud courses. The original version of this article was published by the Hibis Fraud Academy, a MISTI partner.

Graphic reproduced with the kind permission of CIFAS.

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 Nigel Iyer is a partner at Hibis, a UK and Scandinavian advisory organization. MISTI has partnered with Hibis on a number of courses which include "How to Use Data Analytics to Find Fraud," "Find Fraud and Corruption Before it Finds You," "How to Conduct a Fraud Investigation," "Forensic Auditing," and "Internal Auditor's Role in Preventing Fraud."