May 14, 2024 •HoganTaylor
In today’s world, all businesses, big and small, face increased fraud risks. Putting processes in place to prevent fraud isn’t a sign that you don’t trust your employees: it’s an investment in the future of the business, protecting your business against honest mistakes as well as more nefarious actions.
Being a victim of fraud can have all kinds of implications: from a significant drop in revenue or profits to legal challenges and lasting reputational damages. Establishing internal controls and developing risk-based fraud prevention methods is key to protecting your business and ensuring its long-term viability.
In this overview, we share a series of best practices that entrepreneurs, business owners, and executives can put in place to minimize the likelihood of fraud occurring in their businesses. We’ll cover the basics of various internal control and fraud prevention frameworks that you can put in place to better insulate your business.
While these steps help safeguard your business, you shouldn’t consider them unimpeachable. Robust internal controls can (and do) fail. Having a forensic accounting partner you can rely on is key to ensuring your team can respond rapidly to fraudulent activity and quickly address any and all negative impacts.
Types of Business Fraud to Be Aware Of
No business owner enjoys thinking about the idea of fraud, but the statistics indicate it’s a risk entrepreneurs cannot afford to ignore. A 2022 report from the Association of Certified Fraud Examiners (ACFE) estimates that U.S. businesses lose 5% of their revenue to fraud each year, with small to mid-sized private businesses the worst affected.
Fraudulent activities can take many forms, but among the most common are:
- Asset misappropriation
- Bribery and corruption
- Illegal gratuities
- Economic extortion
- Financial statement misrepresentation
- Employee embezzlement
Every industry suffers from industry-specific forms of fraud, from construction to healthcare. Suffering from any of the fraudulent activities outlined here can have significant consequences: the study referenced above found that the median loss per instance of fraud is $117,000.
It’s clear that taking proactive steps to prevent fraud should be on the radar of every business leader. But what exactly do those steps look like?
4 Actions Businesses Can Take to Prevent Fraud
Ideally, businesses should partner with a forensic accounting firm to develop tailored fraud prevention solutions that directly address the unique fraud risks inherent to their business. By working with the right partner, your business can put frameworks in place across the following four areas.
1. Establish Robust Internal Controls
Implementing even the most simple internal controls provides businesses with an additional layer of protection against fraud. Internal controls take a variety of forms, but they all have the same purpose: to ensure the integrity of financial information, increase accountability, and reduce fraud. They are highly process-driven and must be customized to the unique accounting environment of your business.
Here’s an extremely simplified example of an internal control that can prevent fraud in your accounts payable department.
When your company receives an invoice from a vendor, one person should record the invoice in the accounting system. The invoice should then be routed to another individual, who compares what’s recorded in the accounting system against the invoice and then approves the payment. Finally, a third individual is tasked with making the payment to the vendor. The key concept here is the separation of responsibilities for approving invoices and authorizing payment.
This approach spreads the responsibility for the invoice over several individuals, minimizing the chance that fraudulent activity (or an innocent error) can occur and creating a clear record of the payment that can later be verified.
2. Develop Clear Fraud Policies
Another important step organizations can take is to document a series of fraud policies that clearly outline prohibited activities. These policy documents should be distributed to all employees and should include the following information:
- Definitions of prohibited activities and behaviors
- Consequences of fraud, including termination and criminal prosecution
- Procedures that should be followed when fraud is suspected
- Guidelines for employees to follow to report suspected fraud
By creating these documents, businesses not only raise awareness of fraud among their employees, they also signal the business is committed to identifying, investigating, and combating fraudulent activity.
3. Establish an Anonymous Reporting Framework
Creating an environment where employees feel safe reporting fraud is important. Allegations of fraud often involve relatively senior executives since these individuals are entrusted with higher degrees of power and autonomy. This can cause more junior employees to doubt whether to report suspicious activity.
By establishing mechanisms that allow employees to report suspicious behavior anonymously, businesses can handle allegations in a discreet manner. Consider establishing a web page that supports anonymous reporting or set up an anonymous tip hotline to make sure employees feel safe from any repercussions.
4. Invest in Fraud Detection Processes
Financial transactions occur at huge volumes in many businesses, but it only takes one errant payment for your business to become a victim of fraud. Thankfully, the fraud detection technologies available today apply sophisticated data analytics tools to identify errors, anomalies, and suspicious transactions, pinpointing potentially fraudulent activity the moment it occurs.
Working with fraud assessment professionals enables businesses to configure the best fraud detection technologies and strategies for their unique environment. Additional measures, such as obtaining an audit each year, can also help detect fraud, although they should not be relied on to do so.
HoganTaylor: Forensic Accounting Firm in Arkansas and Oklahoma
Fraud has the potential to affect all kinds of organizations: from closely-held family businesses to large organizations with relatively sophisticated internal controls. Investing in the processes, technologies, and policies to prevent fraud is an important matter for all businesses. Taking the steps outlined above is a good start, but it’s best practice to partner with experienced fraud and forensic investigation professionals.
At HoganTaylor, our forensic accounting team provides businesses with support in fraud prevention, detection, and investigation. Our team of Certified Public Accountants (CPAs) and Certified Fraud Examiners (CFEs) provide an objective assessment of your business’s position and are equipped to assess the viability of processes, procedures, and internal controls, providing a series of recommendations your business can adopt to better prevent fraud.
To learn more about the ways HoganTaylor’s Forensic, Valuation, and Litigation Support (FLVS) team can support your business, contact an advisor today.
How HoganTaylor Can Help
If you have any questions about this content, or if you would like more information about HoganTaylor’s Forensic, Valuation & Litigation Support practice, please contact Clay Glasgow, CPA, ABV, CFF, CFE , Advisory Partner.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
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