Fraud prevention is the set of practices and procedures an organization implements to safeguard its assets, maintain accurate accounting records and deter and detect fraud. These include internal controls, segregation of duties and risk management. Choosing the right fraud detection and prevention solution requires establishing clear appetites and practices around managing non-compliance risk. This includes setting up risk thresholds and determining the legal perimeter you must fall within.
Increased Risk of Litigation
As a business owner, you know that fraud can cost your company in more ways than just dollars. You could also face regulatory violations or noncompliance issues and damage to your reputation if malicious actors expose a customer’s information. Fraud detection and prevention tools and techniques are more important than ever to combat these threats. Employee fraud can particularly damage a company, especially from upper-level employees. The current cost of employee fraud is estimated at $50 billion per year in the U.S. alone, according to a 2022 ACFE report. Some of the most common forms of employee fraud include asset misappropriation, embezzlement, and insider trading.
External perpetrators are more difficult to deal with than internal team members, as they may be located anywhere in the world and can use any digital platform to conduct their crimes. These outsiders can be customers, vendors, hackers, or criminal organizations, and 40% of the fraud reported by businesses involve external actors, according to a 2022 PwC report. To keep fraud at bay, you must implement an effective system of checks and balances for your company. Ensure that all your employees understand the definitions and indicators of fraud, so they can quickly report any suspicious activity. It’s also important to provide a method for customers and vendors to submit their reports of fraudulent activities, such as a confidential reporting hotline.
Increased Risk of Damage to Brand
Fraudsters can damage a brand in many ways, and the most obvious is lost revenue. Other damages include stolen data, which can lead to data breaches, identity theft and poor customer credit ratings. These issues can be difficult to repair. They also can impact a company’s reputation, which can have an even greater financial impact. Fraud prevention can help minimize the risks that fraudsters pose to businesses, including financial loss and damaged reputation.
The best way to fight fraud is through internal controls. Employees who know their work is being double-checked are less likely to commit fraud. Some examples of these controls include document verification, requiring two signatures for checks over a certain amount, requiring a “for deposit only” stamp on documents and ensuring that invoices match purchase orders. Additionally, it is important to train employees to spot common fraud schemes and report fraudulent activity.
Employees can perpetrate fraud through various means, including asset misappropriation (stealing company money or assets), false sales reporting, check forgery, forged expense reports, unrendered services, IP theft, cash embezzlement and credit card abuse. Employee fraud is a serious problem and can be hard to detect, especially when higher-level executives and managers commit it. Some fraud prevention strategies that can help reduce the risk of employee-related fraud include implementing codes of conduct and separation of duties, mandatory vacations, employee training, surveillance, fraud hotlines and violation enforcement.
Increased Risk of Financial Loss
Many fraud schemes involve stealing company money or assets. This is a risk for every business, but it can be especially damaging to small businesses. Smaller organizations are more likely to have fewer anti-fraud controls, making it easier for employees to steal from them. Companies must implement strong fraud prevention strategies and train their staff on what to look out for. For example, employees need to know not to send passwords or other sensitive information via email and that checking the details of any invoice before paying is always a good idea. Employee fraud can take various forms, but asset misappropriation and financial statement fraud are the most common. These include stealing cash before or after it’s recorded, submitting false expense reimbursement claims, and taking noncash assets from the company (like inventory or equipment). Financial statement fraud includes manipulating financial reports to make the company appear more profitable than it is. Other types of financial loss from fraud include insider trading, money laundering, and shady business practices. These are more serious risks for financial companies, but fraud prevention can help mitigate these risks. For instance, a study found that reputational damage from fraudulent activities is just as costly to banks as fines.
Increased Risk of Customer Dissatisfaction
Fraud prevention is not just about avoiding financial loss and damage to reputation. It is also about ensuring that customers have a positive experience. If customers feel that a business hasn’t handled fraud well, they may never return. And that’s especially true if the scam is large-scale and affects many customers. For example, a bank’s brand image could suffer when it fails to prevent multiple check or mortgage fraud instances. These incidents could cause customers to switch banks or avoid using the company altogether. And that’s a major setback for any banking organization, fintech, or neo bank, as it can lead to the loss of paychecks and life savings. A clear plan is one of the best ways to ensure your business doesn’t fall victim to internal fraud. This plan should include educating employees on the types of fraud they need to look out for and how to report it. For instance, if an employee notices that their coworker is suddenly working 65 hours a week, this could be a sign of fraudulent activity. As fraudsters become more sophisticated, companies need to have robust systems in place to catch them. That’s especially true for fintechs and neobanks relying on digital channels for most transactions.
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