Each year an average company loses almost 5% of its annual profit just because of employee fraud. In 2019, Global Fraud and Risk Report, around 38% of frauds in business are internal frauds. Small and medium-sized businesses face a greater risk of internal fraud than larger organizations due to many factors. Businesses need to implement best practices concerning employees to control the enterprise’s everyday risk management procedures. So that prevent internal fraud successfully.
Types of Business Fraud
The type of fraud that a business deals with can be divided into three categories; asset misuse, theft, and financial statement fraud. Misuse of assets, although being the least priced, makes up 90% of fraudulent activity. It’s crucial to have a fraud prevention plan to prevent and detect the loss of a company. Preventing fraud is much easier than recovering the loss after the fraud.
But other than renting the internal audit service, there are a few steps like implementing several procedures and controls to minimize the fraud occurrence.
5 Points: How to prevent internal fraud?
Train Employees To Prevent Fraud.
Every employee within an organization must know about the fraud risk policy including the warning signs of fraud, types of fraud, prevention skills, and the consequences related to it. Each of them must train to report any suspicious behavior/action by customers and clients to higher authorities. This kind of awareness affects the staff, and creating an anonymous reporting process is also set to ease reporting about some fellow workers. By this, employees in fraud-prone areas also become aware that management is watching. In every business, there should be a code of ethics, that clarifies that any kind of unethical action will be considered as a punishable offense.
Maintain Internal Controls.
To detect and prevent fraud, every organization needs to create and maintain internal controls. It is a plan/program to safeguard the assets by ensuring the integrity of the financial records to deter and detect fraud. This involves several layers of review and restriction to access financial transaction or account data, listed access, creating multi-person sign-off on any payment reimbursements, arranging overtime, all check writing functions, and other accounting or payroll functions, and arranging independent overview of audit logs of company’s financial record to ensure the integrity of the books.
Segregate Accounting Duties.
Segregation of accounting duties is one of the important components of dealing with internal fraud. In many businesses, only one person is completely responsible for handling all the accounting duties such as processing payments, paying the bills/invoices, handling cash, and recording the activities in the accounting system. That makes the path easy for any fraud to remain unnoticed. On the contrary, a business should engage at least two to three employees to handle these functions to keep the cash handling and account registering separately. This process is effective in revealing any kind of discrepancies in accounting.
Audit the Books Regularly.
Irrespective of the size of the company, one must audit regularly. Audit in the areas that deal with cash, product returns, refunds, accounting functions, and inventory management. At times occasional non-scheduled audits are of more help to detect frauds in critical business areas.
Get Expert Help.
If your business needs more extensive review and audit then you may think of going for a professional accountant or Internal audit service. This way you can implement more efficient fraud prevention steps. Certified Public Accountants (CPA), and Certified Fraud Examiners (CFE) are certified in Fraud forensics (CFF). And can provide extensive help in initiating antifraud policies and procedures. But while opting for external hiring accountants or expert professionals, it becomes important to ensure that these individuals have the experience and reputation to provide the best quality service.
Final thought:
Fraudulent employees do not discriminate against the nature of industries or their geographic location. As an owner, you might face economic deprivation such as huge financial loss, damage to the company’s reputation, and legal costs due to internal fraud. So, having an appropriate strategy can efficiently reduce fraudulent activities. The best way to deal with internal fraud is to know your employees better and check the background of them who will be handling cash or managing payments. Remember the expense you are bearing to prevent fraud is much less than the price of fraud that gets committed.