Fraud by deception happens in business. Any company may be at risk for business fraud even with attempts to implement effective fraud risk management. A study from the Association of Certified Fraud Examiners (ACFE), an organization created in 1988 to combat deception and fraud in business, revealed that businesses lose nearly 5 percent of annual revenue to fraud, with small businesses (companies with less than 100 employees) being most vulnerable. Examples of fraud include asset misappropriation (stealing inventory), corruption in the form of bribery, and financial statement fraud.
However, there are steps that a business can take to mitigate the risk of fraud. Here are five essential fraud risk management strategies that may help protect your business.
5 Key Steps for Effective Fraud Risk Management
1. Assess Fraud Risks
It is important to identify potential fraud risks specific to your industry. For example, a small business that sells a consumer product will have different risk factors than a start-up technology company. A private educational institution will have a different set of vulnerabilities than a local clothing store. Overall, risks for financial fraud (identity theft, ACH fraud), data breaches, or employee theft will vary. Understanding your business’ risk factors will help you prepare so that you may take steps to protect your company.
2. Develop a Management Policy to Deal with Fraud
Having a clear, written policy for fraud detection and response procedures can help your company prepare for various situations. This written policy should define roles and responsibilities for different levels of the company, including employees, management, and stakeholders. It may be helpful to have an attorney review the written policy to ensure that it aligns with legal requirements as well as relevant local and state regulations to avoid potential business fraud penalties.
3. Create Strong Internal Controls
One of the most important steps to preventing fraud includes having checks and balances. By avoiding having one person control an entire company process, the opportunity to engage in fraud becomes less likely. Segregating duties prevents one person from controlling an entire process and reduces fraud risk. For example, if financial records and payroll require separate authorizations, it becomes more difficult for one person to engage in fraudulent practices. Further, it is critical to limit sensitive information and data to authorized personnel only and regularly monitor financial accounts.
4. Leverage Technology and Monitoring Tools
Technology can be a game-changer when it comes to detecting fraud at a company. Various fraud detection software and tools will reveal suspicious activities, unusual transactions, or unauthorized login attempts. Data analytics provides another layer to identify red flags or unusual patterns in your company. Finally, secure encrypted payment systems are critical to keeping financial data safe and avoiding business fraud penalties.
5. Train Employees
Never underestimate the power of training employees on your company’s policies regarding fraud by deception. An educated staff will not only improve the company’s operations but also serve as a barrier to fraud. Some companies encourage reporting of any suspicious activities through a confidential whistleblower system.
Additional Fraud Risk Management Strategies
Regular Audits and Reviews
Internal audits of financial records can be another step in preventing and catching fraud. These audits may evaluate the effectiveness of controls and identify gaps in the system that leave the company vulnerable to financial fraud. By reviewing company processes and systems, your company will be better positioned to adapt its fraud practices and implement necessary changes.
Establish a Fraud Response Plan
Having a firm plan that defines what steps to take once fraud has been detected is another crucial aspect of dealing with fraud. While prevention is the best measure, in the event that fraud still occurs, have a plan that addresses investigation, containment, and recovery processes. Having an attorney involved right away can help protect your company’s financial assets as you collect evidence.
Purchase Fraud Insurance
There is such a thing as fraud insurance. While perpetrators can be sued in civil court and prosecuted, sometimes the financial loss is too great to be recovered through restitution. In this case, fraud insurance may help reduce the immediate financial impact. Regularly review and update your coverage so that it aligns with your business’ needs and protects against business fraud penalties.
Use Common Sense and Stay Informed
Being aware of current fraud trends can help you identify prevention measures and de-escalation strategies. Staying informed about the latest fraud risk management techniques can save your business significant resources.
Use Third-Party Experts
Third-parties such as consultants or forensic accountants can help identify fraud and collect evidence on your behalf. However, when dealing with sensitive financial information, it’s best to consult your attorney before engaging any third party. Cybersecurity firms may be another valuable resource, but it’s important to verify they are legitimate and trustworthy before sharing sensitive information.
How Can an Attorney Help Me with Business Fraud?
While these are steps that you can take to reduce your company’s fraud risk, hiring a company attorney can be an invaluable asset. There are numerous ways an attorney can help a business with fraud, and in many cases, legal counsel may be necessary to avoid legal troubles or handle existing ones.
An attorney can protect your company when drafting policies and contracts, including vendor contracts. They can also review your compliance programs to ensure your company is following business laws. If an investigation becomes necessary, an attorney can assist with that process and help minimize potential business fraud penalties.
Take Action Now to Protect Your Business
Implementing strong fraud risk management strategies is essential for businesses of all sizes. While most companies hope to never deal with fraud, having proper systems in place can significantly reduce your risk and mitigate damages if fraud does occur. Taking proactive steps today can save your business from significant financial losses and legal complications tomorrow.
Contact Us for Legal Assistance
If you need help developing or reviewing your fraud risk management strategy or are dealing with a fraud situation, contact Clayton Trial Lawyers today. Our attorneys can help protect your business and navigate the complex legal landscape surrounding business fraud.