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Worldwide, the average gross revenue lost to fraudulent activities is estimated at around 5% and is growing at a rapid pace. Coupled with ever-tightening economic constraints, this number is not as small as it may seem. Without proper strategies, fraudulent activity can embed itself into an organisation and completely destroy a business.
For most organizations, developing a strategy for effectively dealing with fraud and risk management is a challenge and hence the five principles which we have shared below, as a helpful starting point to formulating a strategy for your business.
- Assessment
The first step to fraud prevention involves identifying and understanding the areas of your organisation’s vulnerability. This will better equip you to conduct an in-depth risk assessment to analyse the unique risks your company faces based on its complexity, scale, products and market exposure.
As this assessment begins with employees, a holistic understanding is required to understand how they interact with the company daily. During this, it is crucial to remember that risk is also external.
After this, a risk-tolerance limit is used to create a framework for the assessment. This limit refers to the maximum amount a company is willing to lose and is helpful to quantifying risk. It also allows more focus to be put on risks that may be more damaging to the organisation.
- Governance
Once the risk assessment has been completed, fraud management should become integral to company culture. Stakeholders should be open to implementing new procedures to improve their understanding of the risk of fraudulent behaviours.
A fraud management strategy should ideally include:
- A strategy to educate top management
- Delegated responsibilities
- Well-constructed whistleblower and reporting procedures
- Quality assurance measures
- Internal audit measures
- A description detailing the investigation process
- Possible corrective actions to be followed
- Tools and techniques for fraud awareness
- Thorough research and analysis of technologies for fraud prevention
The best strategy for this governance is to have one designated leader assigned for your company’s risk management program. All communication regarding this management should run through this individual. Furthermore, this governing body should be in charge of training, monitoring and adjusting as required.
- Prevention
The most effective fraud risk prevention strategies involve implementing detection tools to stop it before it begins. This strategy can be utilised for new customers interacting with your business or a new onboarding employee.
Verifying that an individual is who they claim to be. Through multi-factor authentication, fraud can be stopped before it has an opportunity to embed itself within the organisation. As prevention encompasses stopping fraud before it has happened, risk assessments should be conducted regularly to ensure its accuracy.
- Detection
Controls and reporting used for fraud prevention can also be utilised for detection. Controls can be installed throughout various layers of your organisation to help alert potential fraud. Using these controls correctly can assist in determining variances that flag fraudulent behaviour.
Should fraud be detected, employees should have a streamlined way to correctly flag it.
- Monitoring and reporting
The first four principles of the fraud and risk management process are constantly evolving and require continuous monitoring and reporting to maintain its efficacy. Fraud management solutions are only able to succeed through assessing its successes, blind spots and areas for improvement.
Fraud risk management is an evolving process. Therefore, the first four principles must be constantly monitored and reported on. The only way a fraud management solution will work, is if it’s assessed on successes, blind spots, and areas for improvements regularly.
Preserving an effective risk management strategy involves offering clarity throughout all five principles of this process. When maintained correctly, with all these principles being successfully implemented, an organisation can protect itself from fraudulent behaviour.