Fraud prevention is an issue that businesses need to be proactive about and take seriously. But while increased monitoring and security procedures can help detect and prevent this type of criminal activity, some organizations may not see the value in these efforts until it’s too late, or hesitate due to costs. The reality is that fraud monitoring and prevention should be considered investments in the longevity of a business.
Understand different types of fraud
Companies can be targeted in a variety of ways in an attempt to steal money, private customer data, or other proprietary information. This can come from either internal or external fraud. External fraud originates outside of the company, such as vendors, customers, or others looking to steal from the organization. Internal fraud, which is also known as occupational fraud, is carried out by employees.
Conduct a fraud risk assessment
A fraud risk assessment identifies areas where a company might benefit from stronger monitoring or detection procedures. Using a diagnostic tool like the Association of Fraud Examiners' (ACFE) fraud risk management scorecard, companies can get a better handle on these risks. The tool covers five principles of fraud risk management:
- Governance: Management should establish a fraud risk management program and a corresponding set of internal controls.
- Fraud risk assessment: Assessment of fraud risks and steps to mitigate them.
- Fraud control activities: Putting procedures in place to both prevent and detect fraud.
- Fraud investigation and corrective action: Determine the best ways for management to receive information about potential fraud, investigate claims, and follow up on a timely basis.
- Fraud risk monitoring: Current procedures should be reviewed and reevaluated to ensure that no changes need to be made, given changes in the organization and overall business environment.
Your best line of defense when it comes to fraud prevention is your employees.
Review internal controls and separation of duties
A recent ACFE study* found that a lack of internal controls was the most prominent organizational weakness contributing to occupational fraud. Examples of internal controls can include the following:
- Separating the accounting function from cash control as much as possible.
- Incorporating checks and balances through written procedures and run random quality control checks to make sure they are implemented.
- Limiting access to incoming cash and checks by using a lockbox.
- Auditing time and attendance reports to prevent timesheet fraud.
- Reconciling bank statements on a timely basis.
- Conducting employee screening and background checks prior to hiring.
Educate employees on what to watch out for
The detection tactics mentioned above all play a role in helping to detect and prevent fraud, but your best line of defense is your employees. Your workforce should be educated on what procedures to follow, including how to report and document unusual activity. Findings from the ACFE's 2018 Global Fraud Study show that organizations with anti-fraud training programs experience lower losses and shorter-term frauds than organizations without such programs in place.
Assessing your business to identify points of vulnerability can help determine which fraud prevention solutions can work effectively. Given how easily just a single case of fraud can cripple a small business, consider putting a thorough detection and prevention strategy in place.
* 2018 Report to the Nations. Copyright 2018 by the Association of Certified Fraud Examiners, Inc.