Strengthening Fraud Deterrence and Detection: Key Insights from the AFC Fraud Forum

In today’s rapidly evolving financial reporting and regulatory environment, fraud remains an ever-present threat, requiring vigilance and adaptation.

As the Director of Anti-Fraud Initiatives, I engage in meaningful conversations with a diverse group of stakeholders within the financial reporting ecosystem year-round to stay up to date on all issues related to fraud. At the Center for Audit Quality (CAQ), we recognize that the fight against fraud requires the collective effort of everyone within the financial reporting profession.

During the 2024 International Fraud Awareness Week, the CAQ, as a partner of the Anti-Fraud Collaboration (AFC), hosted its inaugural Fraud Forum. This multi-stakeholder dialogue brought together key players from across the financial reporting ecosystem, in addition to investors and regulators, to explore emerging fraud risks, discuss best practices, and strengthen fraud deterrence and detection.

Read on for my takeaways from this special event.

The Evolving Fraud Risk Landscape

The fraud risk landscape grows more complex every day. Emerging risks such as geopolitical instability, third-party vulnerabilities, and challenges within the talent pipeline present new concerns that require fresh perspectives. Approaching these holistically ensures that fraud deterrence and detection strategies evolve alongside the shifting landscape.

In our discussions at the Fraud Forum, we learned that while fraud risk is inherent in capital markets, massive fraud is not pervasive across corporate America. However, too much emphasis is often placed on the likelihood of fraud rather than its potential impact. Companies should instead consider the potential impact of fraud to strengthen their deterrence and detection efforts.

According to the Association of Certified Fraud Examiners (ACFE)’s Occupational Fraud 2024: A Report to the Nations, public companies have a better chance of detecting fraud sooner compared to other organizations. Anti-fraud controls embedded in an organization’s policy and practices can help proactively protect against fraud, including:

• Code of conduct
• Management certification of financial statements
• Hotline
• Internal audit department

Fraud Prevention: The Human Element

Throughout my conversations with colleagues and subject matter experts, one theme consistently stands out: The human element is crucial in the fight against fraud.

Fraud is not just an accounting or technical issue; it is fundamentally a human problem. Culture and ethics play a critical role in mitigating fraud risk. A company’s ethical environment must be cultivated from the top down, promoting transparency, accountability, and integrity across all levels.

Additionally, hotlines and reporting mechanisms are essential tools in detecting fraud and should be widely utilized. Companies can also encourage employees to speak up and use whistleblower data to effectively offer valuable insights into risk areas. Consequently, organizations with strong internal reporting mechanisms tend to experience better business outcomes and lower fraud risks.

Strengthening Fraud Detection and Response

Investor expectations regarding fraud detection are evolving. According to the CAQ’s 2024 Institutional Investor Survey, over half of investors believe that fraud goes undetected in the U.S. corporate reporting ecosystem.

Enhancing communication between investors and auditors, refining fraud-related procedures, and leveraging technology in fraud detection are vital steps. At the Fraud Forum, participants shared some practical steps to bolster fraud detection, including:

• Enhancing fraud brainstorming sessions by involving forensic experts regularly.
• Strengthening fraud inquiries with more open-ended questioning to uncover potential misconduct.
• Investing in technology and data analytics to improve fraud detection and response times.
• Assessing and utilizing hotline data more effectively to identify risk patterns and inform audit procedures.
• Improving training and education to equip accounting and auditing professionals with the knowledge and skills needed to recognize fraud risks.

The Road Ahead

The fight against fraud requires a collective effort from all members of the financial reporting ecosystem. While regulation and enforcement play crucial roles, transparency and collaboration are equally important.

The CAQ and AFC remain dedicated to convening these essential multi-stakeholder dialogues and driving meaningful change. As we look ahead, organizations must stay proactive, continually assess fraud risks, and implement innovative strategies to further strengthen fraud deterrence and detection.

The productive dialogue from the inaugural Fraud Forum is just the beginning. We invite financial reporting ecosystem stakeholders, regulators, and investors to join us in this ongoing effort to uphold the integrity of our capital markets. Together, we can build a stronger, more fraud-resilient future.

I encourage you to follow the AFC on X and LinkedIn to stay up to date on the latest anti-fraud issues and developments.

You can read the full Fraud Forum summary here.