Minimising financial losses at your organisation requires strategies to prevent corporate fraud. Cost-benefit analyses have shown that investing in strong fraud prevention controls makes good financial sense. Fraud significantly impacts profits, meaning that companies need to sell more to cover the losses incurred. According to the Association of Certified Fraud Examiners, organisations are estimated to lose up to 5% of revenue to fraud each year. In the most serious cases, fraud can bring down an entire company. In 2013, Balli Steel PLC collapsed after the CEO and two senior executives defrauded over twenty banks out of $500 million.
Once fraud has occurred, the cost of investigation, prosecution, and remediation can quickly add up to a sizeable amount. In addition to these expenses, the negative publicity arising from fraud can severely impact an organisation’s reputation. Adopting proactive fraud prevention controls is essential for protecting your profit margin!
Seven ways to mitigate risks in your organisation
1. Increase the perception of detection: For anti-fraud controls to be effective, employees first need to know they exist! You can achieve this through training programmes, memoranda, and published policies covering anti-fraud, ethics, conflicts of interest, and receipt of gifts. Knowing that there are systems to monitor access to warehouses or that travel expenses are checked carefully, can deter staff from attempts to commit fraud. Reporting systems, such as whistleblower hotlines, can also be useful for increasing the perception of detection. If detected, there must be a zero-tolerance policy with consistently applied penalties for any fraudulent conduct.
2. Proactive Auditing: Proactive audit procedures and analytical reviews can be used to identify trends that indicate potentially fraudulent activity. With routine monitoring of transactions and accounting data, anomalies can be detected early. Surprise audits can also help to deter fraud or detect it before it reaches critical proportions. In 2014, the supermarket giant Tesco referred itself to the regulatory authorities. They discovered that income from subsequent accounting periods had been brought forward to falsely inflate its profits. The Serious Fraud Office investigation resulted in a Deferred Prosecution Agreement requiring Tesco to pay a £129 million fine plus £3 million in costs.
3. Anti-fraud training: Employees at all levels of an organisation should receive anti-fraud training. The aim is to make staff aware and vigilant for any signs of fraud. Training should demonstrate the harm fraud causes to both employees and the company. It should also explain how to identify the signs of fraud in terms of transactions and behaviour, how to report it, and the applicable penalties.
4. Commitment from the Top: An essential factor in mitigating fraud risks is creating a corporate culture based on ethical conduct, honesty, and integrity. Senior management and executives need to model ethical behaviour and uphold the standards they expect from their staff. Furthermore, employees must feel able to challenge management’s decisions without fear of negative consequences. We recommend an open-door policy, as well as financial assistance programmes, recognition of good work and social events.
5. Physical Controls: Access to sensitive information and valuable inventory or equipment should be restricted to only those employees who need it. It should also be closely monitored for anomalies.
6. Background Checks: Conducting due diligence checks before hiring new employees and annual checks on more senior staff are essential measures for preventing fraud. Any history of dishonesty or theft can be detected before it’s too late!
7. Fraud Risk Assessments: Periodic Fraud Risk Assessments are an essential tool for increasing the perception of detection, evaluating the effectiveness of any existing controls, and identifying fraud vulnerabilities. In addition, as the provisions of the new Economic Crime and Corporate Transparency Act (ECCTA) come into force, having an up-to-date Fraud Risk Assessment will become even more important. The ECCTA introduced the new crime of Failure to Prevent Fraud (“FTP Fraud”). Entities classified as “large” will be held liable if any of their “associates” commit a specified fraud offence with the intention of directly or indirectly benefitting the organisation. The new offence will be applicable even when the primary motivation is to benefit the individual but with the secondary intention of benefitting the organisation.
The Importance of Fraud Risk Assessments Under New Legislation
The new legislation will require organisations to implement “reasonable procedures” to prevent corporate fraud. This will serve as one of the few legal defences available against an accusation of FTP Fraud. Guidance on the meaning of “reasonable procedures” is due to be published later this year. This means that the FTP Fraud offence is likely to come into force some time in 2025. The guidance is expected to be similar to the “adequate procedures” an organisation must have in place as a defence against the Bribery Act’s “failure to prevent bribery”, one of which is a documented risk assessment conducted periodically.
With this in mind, organisations qualifying as “large” should consider conducting a Fraud Risk Assessment as soon as possible. A Fraud Risk Assessment conducted by trained anti-fraud professionals is the first step in effectively managing your organisation’s fraud exposure. Certified Fraud Examiner, TenIntelligence Founder and CEO, Neil Miller, is ready to help you. With decades of experience working with a wide variety of sectors, we can tailor the process to suit your business.
Take Action with TenIntelligence
We are ready to help prevent corporate fraud in your organisation. Our team of experienced analysts can conduct due diligence checks on new and existing employees.
We can also conduct a Fraud Risk Assessment on your organisation to identify any gaps in compliance or potential vulnerabilities.
Connect with us to learn how we can help you prevent fraud from occurring at your organisation.
Written by
Catherine Da Costa