How to mitigate fraud in your business

The latest Association of Certified Fraud Examiners (ACFE) Report to the Nations estimates that, on average, organisations lose 5% of their revenue each year to employee fraud and theft. Typically, fraud schemes run for around 14 months before detection, and more than 43% of schemes were only detected following a tip from employees or other involved parties. This means that formal fraud detection measures and auditing were only successful in uncovering employee fraud and theft in a little over half of the reported cases.

More than half of all occupational fraud incidents occurred in four departments: operations (15%), accounting (14%), executive/ upper management (12%) and sales (11%). The study also found that certain types of fraud risks were more likely to occur in small businesses than in large organisations. Billing fraud is two times more likely to occur in a small business, as is payroll fraud, while cheque and payment tampering is four times more likely to occur in a small business.
In dealing with instances of fraud and theft, 46% of companies did not involve the authorities, as they believed that handling the matter internally was sufficient. Unfortunately, this approach often enables fraudsters to continue their activities at other companies down the line.

If you are the business decision-maker at your company, statistics like these should absolutely concern you, as South Africa topped the leaderboard with the largest number of reported cases in Sub-Saharan Africa. The fact of the matter is that no business is safe from internal fraud, which tends to be more prevalent during a tough economic climate. The only way to work around this potentially catastrophic risk is to put adequate measures in place, consisting of a combination of insurance cover and risk management practices. A good adviser can help you to develop a robust risk management strategy; however, implementation and constant review is up to you. Luckily, covering just a few basic areas can help to safeguard your business from potential fraud losses:

Start with fraud awareness training
The most effective way to detect fraud is by having vigilant employees. Make sure that all employees understand the types of fraud that might impact your business, as well as which warning signs to look out for. It also prevents your employees from inadvertently becoming accomplices in a fraud scheme. Fraud is often perpetrated by suppliers who may trick employees into assisting them in their schemes. At the same time, internal fraudsters could also fool other employees into breaking protocol and helping them to steal funds. This is why regular and thorough employee training is paramount.

Put policies and reporting mechanisms in place
The study by ACFE found that 43% of fraud cases were uncovered following a tip, and half of the tipsters were employees. Around a third of tips were made by whistle-blowers via telephone hotlines and emails. This goes to show that if you put the right reporting mechanisms in place, your chances of detecting fraud early increase exponentially.

Along with this, you should have very clear procedures in place that employees can follow in order to avoid fraud. Rules like ensuring that at least two people approve payments, or conducting regular department audits, are vital in keeping your business safe.

Have a zero tolerance approach
If your company ever falls victim to fraud, is it crucial to ‘bite the bullet’ and contact the relevant authorities. It sends a very clear organisation-wide message that your business takes fraud seriously, and also helps to prevent the perpetrators from simply setting up shop elsewhere.

Get insured
Even with all of the risk management measures you can think of, no business is 100% fraud proof. In light of this, having adequate insurance cover is incredibly important. A fidelity and crime insurance policy will help to protect your business from occupational fraud or dishonest acts perpetrated against it. It covers exposures such as employee dishonesty and theft, forgery, loss of money and securities, reimbursement of expense claims, funds transfer fraud, computer fraud and social engineering.

Always remember that insurance becomes more affordable when you can show your insurer that you are actively managing your risks. As a starting point in these challenging times, work with your adviser to put a fraud prevention plan together as soon as possible. And make sure that your adviser has all the necessary information to secure the best premium possible. Your adviser is the best point of contact to construct the right insurance portfolio as a defence against potential fraud-related losses.