According to the Association of Certified Fraud Examiners (ACFE) in their “Occupational Fraud 2024: A Report to the Nations,” four antifraud controls are associated with at least a 50% reduction in both fraud loss and duration: financial statement audits, reporting hotlines, surprise audits, and proactive data analysis. Interestingly, the study found that surprise audits and proactive data analysis are among the least commonly implemented controls. Here’s how your organization can benefit from conducting periodic surprise audits.
Financial Statement Audits vs. Surprise Audits
Many business owners and managers assume that annual financial statement audits are sufficient to detect and deter fraud. However, financial statement audits should not be the primary antifraud mechanism for an organization.
In contrast, surprise audits provide a closer examination of a company’s internal controls designed to prevent and detect fraud. These audits identify weaknesses that could make assets vulnerable and determine whether those weaknesses have already been exploited to misappropriate assets.
Auditors typically focus on high-risk areas such as cash, inventory, receivables, and sales. They conduct these audits unexpectedly, either when the owners suspect foul play or randomly as part of the company’s antifraud policies. During a surprise audit, the auditor may follow a different process or schedule than during an annual financial statement audit. For instance, the auditor might start with receivables or vendor invoices instead of beginning with cash.
The element of surprise is crucial because fraud perpetrators are often on guard. Announcing an upcoming audit or performing procedures in a predictable order allows wrongdoers to cover their tracks by shredding documents, altering records, or hiding evidence.
Significant Benefits
The 2024 ACFE study highlights the primary advantages of surprise audits: reduced financial losses and shorter durations of fraud schemes. Organizations that conduct surprise audits experience a median loss of $75,000 compared to $200,000 for those that don’t — a 63% difference. This discrepancy is due to the longer undetected duration of fraud schemes in organizations that do not conduct surprise audits. The median duration in such organizations is 18 months, compared to only nine months for organizations that perform surprise audits.
Surprise audits also have a strong deterrent effect. Companies should include in their fraud policies that random tests will be conducted to ensure internal controls are not being circumvented. If this isn’t enough to deter potential thieves or convince current perpetrators to abandon their schemes, seeing guilty co-workers get caught 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. Additionally, 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 can’t afford to be lax in its antifraud controls. The ACFE estimates that occupational fraud costs the typical organization 5% of its revenue annually, with a median loss of $145,000 caused by fraud. If your organization doesn’t already conduct surprise audits, contact us to discuss how they can be used to strengthen its defenses against occupational theft and financial misstatement.
