Corporate Fraud: How to Identify, Address, and Prevent

Fraud is a very real problem in today’s corporate environment that costs large corporations in the U.S. between $181 and $364 billion every year¹. These costly fraudulent activities can take a variety of forms, from asset misappropriation to falsified financial statements.

The good news? Your company has the power to stop it. As the types of fraud and the technology behind them continue to evolve, so do the strategies to identify and prevent them moving forward.

Corporate Fraud, In All Its Forms

The most common type of internal fraud is asset misappropriation, which includes theft of inventory, money, business opportunities, and anything else of value. This type of fraud ranges in magnitude from an employee skimming a few dollars from petty cash to theft of expensive assets or intellectual property.

Corruption is another type of fraud, and it’s the stuff Hollywood movies often dramatize. This type of fraud includes bribery and kickbacks, with vendors and / or employees colluding to secure an inappropriate financial gain.

Then, there’s financial statement fraud. This involves an employee manipulating financial reports to create an inappropriate benefit for themselves or another interested party. This type of fraud is especially damaging as it can erode public confidence in your financial statements and upper management. Upon discovery, financial statement fraud is often met with government fines, criminal penalties, or even the failure of the organization.

Strategies to Prevent Fraud Before It Happens

Of course, the best-case scenario when it comes to fraud is stopping it before it starts. Preventative policies are useful deterrents that can help minimize your fraud exposure.

Corporate policies can be designed to ensure that any one employee doesn’t hold too much access to critical company data or processes. This is commonly referred to as “separation of duties.” For example, separating the person who submits payments from the person who approves them can help to ensure that no single person has the power to create and authorize a fraudulent payment.

In addition to robust internal policies and procedures, you can institute awareness programs that keep fraud prevention fresh on all employees’ minds. These programs let potential fraudsters know that everyone is fraud-aware, which can be a very effective deterrent. Things like suggestion boxes or anonymous whistleblower hotlines can empower your best employees to report activities that seem suspicious.

Identifying and Addressing Fraud as It Happens

Too often, fraud is uncovered as a result of an internal tip and subsequent investigation – someone sees something, says something, and then the company works to right the wrong. The problem with this reactive approach is fraud investigations rarely result in the recovery of all the associated losses.

When possible, a company should implement policies and procedures that are designed to identify and prevent fraud before it happens. However, fraud can still occur despite your best efforts, and fortunately, there are methods to identify this malicious activity quickly and minimize losses.

The First Line of Defense: An Empowered Team

Your team members are the eyes and ears of the company. You must focus on creating an environment where employees feel comfortable reporting things they see as inappropriate.

Technology Allows for Automated Controls

Your company can create alerts or red flags in internal systems to send notices to the proper stakeholders when aberrations in financial data appear. This creates another set of “eyes” to watch for potential fraud, but creative fraudsters can sometimes find ways around automated controls.

Trust But Verify

The best way to manage fraud at a high level is to institute a robust program of internal controls and audit them to ensure they are functioning without material exceptions. Public companies are required to perform a certain level of internal audit, but not all private companies make this investment. An internal audit team can be an invaluable resource when attempting to identify and prevent internal fraud.

3rd Party Review

As a further layer of assurance, you can engage external audit firms or consultants to conduct unannounced fraud detection engagements. These activities leverage the element of surprise to catch any wrongdoers off guard.

Implementing these types of strategies helps to create a corporate culture where fraud prevention is seen as a priority. So, it stands to reason that putting the time and investment into anti-fraud policies can pay big dividends over the long-term.

Prevent Fraud Before It Happens With ADM

At ADM, we take the possibility of fraud seriously. Our vendor payment solutions eliminate the opportunity for internal fraud or collusion in accounts payable, stopping temptation before it starts. Further, our deposit management solutions were designed to minimize your risk of financial payment and transaction fraud with built-in dual authorization. This feature requires two or more employees to authorize any payment or withdrawal – thereby eliminating the threat of a single bad actor accessing company funds.

Contact one of our friendly associates today to discuss how ADM can help as you work to protect your business while keeping cash safe and earning a competitive return.

Sources:

¹ Dyck, A., Morse, A., & Zingales, L. (2017). How Pervasive Is Corporate Fraud?. NYU Law. Link to PDF from NYU.