Occupational fraud can have a significant financial impact on businesses, often remaining hidden for months before it's discovered. In fact, the Association of Certified Fraud Examiners' (ACFE) Occupational Fraud 2026: A Report to the Nations estimates that organizations lose approximately 5% of annual revenue to fraud and that the typical scheme lasts 12 months before detection. Although financial statement audits aren't designed specifically to detect fraud, they can help strengthen oversight, identify potential warning signs and support a more effective fraud prevention strategy.

Examining the Latest Fraud Data

The ACFE study highlights the critical role internal controls and oversight play in reducing fraud risk. More than half of the fraud cases analyzed involved either a lack of internal controls or management overriding existing controls, underscoring how weaknesses in governance can create opportunities for misconduct.

The study also found that organizations with established antifraud measures generally suffered lower fraud losses and detected schemes more quickly than those without such safeguards. Effective controls included external financial statement audits, management review processes, proactive data monitoring and surprise audits. Together, these findings reinforce the importance of a comprehensive fraud prevention strategy that combines strong internal controls with independent oversight.

What an Audit Can and Can’t Do

The purpose of an audit isn’t to detect fraud. Instead, it provides an express opinion about whether the financial statements are fairly presented, in all material respects, in conformity with U.S. Generally Accepted Accounting Principles (GAAP) or another comprehensive basis of accounting.

An audit provides a reasonable level of assurance that financial statements are free from material misstatement and conform with GAAP. However, external audits don’t provide guarantees against intentional financial statement fraud or inadvertent errors.

How Audits Support Fraud Prevention and Detection

Auditors play a crucial role in supporting the integrity of financial reporting. Here’s how certain audit procedures may help reveal suspicious activity and identify weaknesses in your business’s controls:

• Risk assessments. These assessments identify high-risk areas for misstatement or errors. They help direct the auditors’ attention to the accounts and transactions that warrant more rigorous audit procedures. Auditors analyze the business’s operations, financial reporting processes, internal controls and industry environment to pinpoint potential risks. Then they develop audit plans focusing on these areas.
   

• Testing transactions and controls. Auditors perform various procedures during fieldwork to help them detect discrepancies that may indicate fraudulent activity. For example, they may test certain financial transactions and account balances to verify their accuracy and completeness. They may also examine supporting documentation, such as invoices, contracts and bank statements, to ensure that transactions are legitimate and properly recorded. And they might confirm accounts receivable, review pending litigation and physically observe year-end inventory counts. Auditors customize their procedures to fit each business’s risk assessment.

  Auditors are trained to recognize the warning signs of fraud, including unusual transactions, inconsistencies in financial records and deviations from standard procedures. When auditors identify red flags, they may ask questions and conduct additional audit procedures to help ensure the financial statements are fairly presented and conform to GAAP.
   

• Supporting compliance and accountability. Businesses must comply with a wide range of laws and regulations, including those related to financial reporting, taxes and corporate governance. Auditors consider laws and regulations that could have a material effect on the financial statements and may identify issues that warrant management’s attention or further review.

Strengthening Your Fraud Prevention Strategy

No organization is immune to fraud. But an external audit can help reduce your risk by examining financial reporting procedures, evaluating internal controls and identifying potential warning signs before they become larger problems. Look to our audit and forensic accounting pros to help you assess fraud risk, build a stronger prevention strategy and investigate suspicious activity.