Fraud can be defined as a deliberate misrepresentation to gain an advantage over another party. Fraud comes in many different forms, including fraud in financial statements, the misappropriation of assets (theft) and subsequent cover-up, and disclosure fraud.
Fraud is not the same as an error, which can occur innocently. Fraud is a purposeful act to mislead others.
A common element of fraud is it leads to (material) misrepresentation of the financial statements.
How Fraud is Detected
According to the ACFE study of Occupational Fraud, the most common method of detection was a “tip,” (43%).
In organizations with hotlines, 49% come from a tip but declines to 31% percent in organizations with no hotline.
Internal audit was next with 15% followed by management review (12%).
The results indicate the need for strong internal controls and an effective audit committee.
Fraud Detection Methods
| Detection Method | Percentage Reported | Median Loss |
| Tip | 43% | $145,000 |
| Internal Audit | 15% | $100,000 |
| Management Review | 12% | $100,000 |
| Other | 6% | N/A |
| By Accident | 5% | $200,000 |
| Account Reconciliation | 4% | $81,000 |
| Document Examination | 3% | $101,000 |
| External Audit | 4% | $150,000 |