According to the "Occupational Fraud 2024: A Report to the Nations" by the Association of Certified Fraud Examiners (ACFE), four antifraud measures have been linked to a reduction of at least 50% in both fraud loss and duration. These measures include financial statement audits, reporting hotlines, surprise audits, and proactive data analysis. However, the ACFE study highlights that surprise audits and proactive data analysis are among the least commonly implemented controls. Here’s how your organization could gain from conducting periodic surprise audits.
Financial statement audits vs. surprise audits
Business owners and managers often dismiss the need for surprise audits, mistakenly assuming their annual financial statement audits provide sufficient coverage to detect and deter fraud among their employees. But financial statement audits shouldn’t be relied upon as an organization’s primary antifraud mechanism.
By comparison, a surprise audit more closely examines the company’s internal controls that are intended to prevent and detect fraud. Such audits aim to identify any weaknesses that could make assets vulnerable and determine whether anyone has already exploited those weaknesses to misappropriate assets.
Auditors usually focus on particularly high-risk areas, such as cash, inventory, receivables, and sales. They show up unexpectedly, usually when the owners suspect foul play, or randomly as part of the company’s antifraud policies. In addition, an auditor might follow a different process or schedule than during an annual financial statement audit. For example, instead of beginning audit procedures with cash, the auditor might first scrutinize receivables or vendor invoices during a surprise audit.
The element of surprise is critical because most fraud perpetrators are constantly on guard. Announcing an upcoming audit or performing procedures in a predictable order gives wrongdoers time to cover their tracks by shredding (or creating false) documents, altering records or financial statements, or hiding evidence.
Big benefits
The 2024 ACFE study demonstrates the primary advantages of surprise audits: lower financial losses and reduced duration of schemes. The median loss for organizations that conduct surprise audits is $75,000, compared with a median loss of $200,000 for those organizations that don’t conduct them — a 63% difference. This discrepancy is no surprise in light of how much longer fraud schemes go undetected in organizations that fail to conduct surprise audits. The median duration in those organizations is 18 months, compared with only nine months for organizations that perform surprise audits.
Surprise audits can have a strong deterrent effect, too. Companies should state in their fraud policies that random tests will be conducted to ensure internal controls aren’t being circumvented. If this isn’t enough to deter would-be thieves or convince current perpetrators to abandon their schemes, simply seeing guilty co-workers get swept up in a surprise audit should help.
Despite these benefits, the 2024 ACFE study found that less than half (42%) of the victim organizations reported performing surprise audits. Moreover, only 17% of companies with fewer than 100 employees have implemented this antifraud control (compared to 49% of those with 100 or more employees).
We can help
Your organization cannot afford to overlook antifraud controls. According to the ACFE, occupational fraud costs the average organization 5% of its revenue each year, with a median loss per incident amounting to $145,000. If your organization does not currently perform surprise audits, reach out to an Axley & Rode advisor to explore how they can strengthen defenses against occupational theft and financial misstatement.
© 2024
