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You Are Here 5 All JMME 5 Audit and Assurance 5 Avoiding Business Fraud

Avoiding Business Fraud

Avoiding Business Fraud

When it comes to business fraud, many people assume that the perpetrators are shady characters with a history of criminal activity. However, the reality is quite different. People who commit fraud are often trusted individuals with no previous criminal record.

Why is this the case, and how can businesses protect themselves from this type of fraud?

In this article, we’ll explore these questions and provide tips for avoiding business fraud.

Why Trusted Individuals Commit Fraud

One of the main reasons that trusted individuals are more likely to commit fraud is simply that they have access to sensitive information and financial resources.

For example, a manager with access to the company’s bank account may be able to divert funds for personal use. 

Additionally, trusted individuals often have a greater level of authority within the company, which can make it easier for them to manipulate financial records and cover their tracks.

Another reason that trusted individuals are more likely to commit fraud is that they may feel a sense of entitlement or ownership over company resources. 

This can be especially true for long-time employees who feel that they have put in years of hard work and deserve a little extra compensation. Unfortunately, this mindset can lead to fraud if the individual feels that they are not being adequately compensated.

The rising cost of living and the increased risk of business fraud

We are currently witnessing a rapid increase in the cost of living and inflation, which can also increase the risk of fraudulent activities within businesses.

When the cost of living rises, employees may feel pressure to seek additional compensation. This can lead to fraudulent activities like embezzlement, theft, or misappropriation of company resources.

Additionally, rising costs may lead businesses to cut corners or reduce oversight, making it easier for fraud to occur.

To prevent fraud from occurring, businesses should stay on top of their financial management and conduct regular internal audits to detect any signs of fraudulent activity.

Policies and procedures should be updated regularly to reflect the current economic landscape, and open communication with employees is crucial to ensuring that everyone understands the company’s expectations and the consequences of fraudulent activities.

How Internal Audits Can Help Prevent Fraud

So, how can businesses protect themselves from fraud perpetrated by trusted individuals?

One key solution is to implement an internal audit program. An internal audit is an independent review of the company’s financial and operational processes. The goal of an internal audit is to identify areas where fraud or other financial irregularities may be occurring and to recommend improvements to prevent future incidents.

One of the main benefits of an internal audit is that it provides an extra layer of oversight and accountability. By having an independent team review financial records and processes, businesses can detect potential issues before they become major problems. Additionally, an internal audit can help businesses identify areas where policies and procedures may need to be updated or strengthened.

Another benefit of an internal audit is that it can help prevent fraud by deterring potential perpetrators. If employees know that their actions will be closely monitored and that any irregularities will be detected, they may be less likely to attempt fraudulent activities.

Tips for Preventing Business Fraud

In addition to implementing an internal audit program, there are several other steps that businesses can take to prevent fraud.

Here are a few tips:

  1. Set clear policies and procedures for financial transactions and record-keeping. This will help ensure that everyone in the organisation understands what is expected of them and will make it more difficult for individuals to manipulate financial records.
  2. Conduct background checks on all employees, especially those in positions of trust. While a clean criminal record is not a guarantee that an individual will not commit fraud, it can help businesses identify potential red flags.
  3. Implement a system of checks and balances. For example, require multiple people to sign off on financial transactions or have an independent team review financial records regularly.
  4. Train employees on how to identify and report potential fraud. Provide a clear process for reporting suspicious activity and ensure that employees know that they will not face retaliation for speaking up.

By taking these steps, businesses can protect themselves from fraud perpetrated by trusted individuals.

What to Do if Your Business Experiences Fraud:

Despite taking preventative measures, some businesses may still fall victim to fraud.

If a business experiences fraud, it’s important to act quickly to limit the damage and prevent future incidents.

The first step is to conduct an internal investigation to determine the scope of the fraud and identify the individuals involved. Depending on the severity of the incident, it may be necessary to involve law enforcement or legal counsel.

Additionally, the business should review and update its policies and procedures to prevent similar incidents from occurring in the future.

Finally, the business should communicate with any affected stakeholders, such as customers, suppliers, and investors, to ensure transparency and rebuild trust. By taking prompt and decisive action, businesses can minimise the impact of fraud and move forward with confidence.

While no system is foolproof, implementing an internal audit program and other preventative measures can help minimise the risk of financial loss and damage to a business’s reputation.

If you would like a fraud risk assessment and review of your business, then contact us.

Ryan Schischka

Ryan Schischka

Director - Audit and Assurance