TAKEAWAYS
Fraud is a persistent challenge in the public sector, draining valuable resources and undermining public trust. While fraud risk management is well understood in theory, effective detection and prevention remain complex in practice. Accountants, auditors, and financial professionals play a pivotal role in strengthening fraud risk controls, leveraging technology, and fostering a culture of integrity.
This article explores key fraud detection mechanisms and preventive strategies, drawing on real-world public sector cases to illustrate practical takeaways for finance professionals
Public sector fraud encompasses a range of deceptive practices including procurement fraud, payroll fraud, and financial misrepresentation. The Association of Certified Fraud Examiners (ACFE) categorises occupational fraud into three primary types:
Several high-profile cases in Singapore have highlighted these risks. For instance, procurement fraud in statutory boards such as the Singapore Land Authority (SLA) and falsified financial transactions in social assistance programmes serve as cautionary examples of systemic weaknesses in controls.
The Report of the Auditor-General also highlights, on occasion, “irregularities” such as potential fabrication of documentary evidence produced for audit, which typically warrant the government agency to conduct further investigations. Some of these investigations have led to the filing of police reports resulting in the prosecution and consequent criminal conviction of the wrongdoers.
While internal controls provide the first line of defence, early fraud detection is crucial in mitigating financial losses. Here are three key fraud detection tools:
1) Whistleblower mechanisms: The power of internal reporting
Studies show that most fraud cases are detected through tips from employees or third parties rather than internal audits. Yet, an ineffective whistleblower policy can discourage reporting due to fear of retaliation or inaction.
Key best practices:
According to ACFE’s 2024 Report to the Nations, organisations with a robust whistleblowing system experienced 50% lower fraud losses than those without one.
From my own experience in charity governance, it was whistleblowing that led to the investigation of wrongdoing in a charity. Most of the actionable tips that led to either internal audit, compliance or regulatory authorities conducting investigations were only made possible when whistleblowers came forward with specific information and, at times, documents to substantiate the allegations of wrongdoing.
2) Data analytics: Identifying fraud patterns
Advancements in data analytics have transformed fraud detection, allowing auditors to detect anomalies in large datasets. Techniques include:
For example, Singapore’s Auditor-General’s Office (AGO) has used data analytics to uncover irregularities in procurement processes, revealing inflated invoicing and unauthorised disbursements.
As a former Head of Internal Audit in a government agency, I also used data analytics tools (formerly known as computer-assisted audit tools) such as Caseware IDEA or even Microsoft Excel to analyse data on procurement, expense claims, fixed assets and investments for the various internal audits that were carried out in the past.
3) Red flags and behavioural indicators
Understanding behavioural cues is as important as financial analysis. Common red flags include:
Organisations should train employees and auditors to recognise these signs and escalate concerns appropriately.
While detection is critical, prevention remains the ultimate goal. Here are three essential fraud prevention strategies
1) Strengthening internal controls through segregation of duties
One of the simplest yet most effective controls is segregation of duties (SoD), ensuring that no single individual has control over an entire financial transaction. The four key functions that should be separated are:
A lack of segregation was a key weakness in past fraud cases, such as procurement fraud in public agencies, where a single officer could both approve and process payments.
2) Tone at the top: Building a culture of integrity
Leadership commitment to ethical conduct sets the foundation for fraud prevention. The “Tone at the Top” framework emphasises:
A strong ethical culture discourages fraudulent behaviour by increasing the perception of detection.
3) Enhancing oversight and compliance mechanisms
Public sector entities should adopt global best practices in fraud risk management, such as:
Given that early fraud detection saves costs, it is important to implement whistleblower programmes, data analytics, and red flag monitoring to identify fraud risks promptly.
Prevention is stronger than detection. So, strengthen the segregation of duties, oversight mechanisms, and ethical culture to reduce fraud opportunities.
Technology is an ally in fraud risk management. Leverage AI-driven analytics, forensic audits, and real-time transaction monitoring to enhance fraud detection.
As fraudsters become more sophisticated, all ISCA members, accountants and auditors must evolve our approach, combining traditional controls with modern technology and behavioural insights. A proactive fraud risk management strategy is no longer optional, it is essential for safeguarding public trust and financial integrity.
Yoong Ee Chuan, FCA (Singapore), CISA, CISM, CIA, ISCA(FFP), CFE, ASEAN CPA, is Founder and Managing Director, RxE Integrity Advisory.
© 2024 Institute of Singapore Chartered Accountants
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