Ways organizations work to prevent financial fraud

Financial fraud is an issue highlighted in the 21st century, particularly after scandals which arose from companies such as Enron, Tyco, and WorldCom and others that subsequently rocked society when news of these incidents hit the media.

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These frauds were of massive proportions, but frauds occur in smaller businesses too. However, small business fraud generally does not receive the same wide exposure the larger scandals do, but this does not mean these smaller frauds come without impact.

In a study conducted by Philip Blank, senior research analyst at Javelin Strategy & Research, it was concluded that small business owners lost $8 billion to fraud in 2010, and a percentage of this vast amount was internal fraud. In 2016, the Association of Certified Fraud Examiners (ACFE) reported small businesses in the United States will lose, on average, 5 percent of their gross revenue to fraud. Additionally, small businesses rank highest in occupational fraud Statistics suggest small business fraud is placed at 37.7 percent whereas large corporations are at 20.85. (courtesy BusinessFraudPrevention.org)

The biggest contributing factor is a lack of internal controls. Awareness of fraud and instilling preventative mechanisms to prevent fraud from occurring either externally or internally is a way business owners and/or managers can alleviate theft. Business owners or managers want to protect their companies from fraud by establishing more robust internal controls.
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There are a few ways this can be accomplished:

Identify weaknesses

In order to place preventatives in place, it is important to understand and identify any potential weaknesses in the company. It is a good idea to consider various fraud scenarios and see if current internal controls would stop the fraud. Armed with this knowledge, if necessary, stronger internal controls that address these weaknesses can be put into place.

Use checks and balances

Business Dictionary defines checks and balances as an "internal control mechanism that guards against fraud and errors due to omission." Verification and paper trails are essential components in place that can help allay fraud.

Establish segregation of duties

Checks and balances are vital and, as a part of these, segregation of duties should be included, meaning responsibilities are split among different departments, or in the case of the small business, different employees.

For instance, the person who orders purchases should not be the individual approving them, or the person authorizing payments should not be the one doing the payments out. Essentially, there should be more than one person handling financial transactional steps including initiation, approval, recording, reconciling, handling assets or preparing reports. If one person is responsible for doing all approvals and spending, then this opens a business up to fraud.

Do internal audits

As a part of corporate governance, it is a good idea to conduct audits. This way all transactions are documented, accounted for, and verified. With this type of transparency and ability to check trails, either paper or digital, will decrease the possibility of any potential fraudulent behavior escaping without detection.

Install technology

Technology is largely a part of internal controls these days. Due to the powerful capabilities of technology, every transaction not only leaves a digital footprint, but is stored and backed up. This way if anything is amiss, the problem can be quickly identified and/or verified when utilized with the other internal controls described above.

While tech can be a solution, it can also create the problem. These days it is more important than ever for organizations to invest in information security to ensure no underhanded business is going on and to prevent malware and other means of data breaches from occurring.

Additionally, it is important to maintain a secured network. This includes a good firewall and anti-virus system, both to be updated regularly, to provide an additional layer of protection from external hacks and thieves looking to break into an organization. As another layer of security, surveillance equipment on the premises can help mitigate both external and internal fraud.

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In terms of practice, many companies already have to have many of the above recommended mechanisms in place as required by the Sarbanes-Oxley law (which affects countries both in and outside of the United States if the company trades in the U.S.), however, even those businesses which do not fall under SOX's realm would benefit from following some of the types of requirements outlined in SOX.

Fraud is a lucrative business for criminals, but a costly one for organizations. Unfortunately, many companies are routinely targeted for scam either internally or externally. However, by placing a series of protective and preventative practices in place, fraud can be better controlled and, in the best of scenarios, eliminated.


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