How to Create a Fraud Prevention Plan for Your Business

Even if you feel you can trust all your employees and have confidence in your internal controls, your business is still susceptible to fraud and needs to consider this risk strongly.

Losses related to fraudulent activities are extremely prevalent; in fact, about 5% of all global revenue is lost to fraud. Fraud involves the false representation of facts for the purpose of gaining something that may not have been available or provided without deception and can be carried out by one or many individuals.

Fraud prevention is a complex concept to implement because fraudulent activities can be committed by anyone and are often committed by your most trusted employees who occupy high positions within accounting, upper management, and sales. On average, it takes more than a year to detect fraud, costing companies $8,300 per month per occurrence.

The types of fraud a business has to look out for vary wildly, from insider accounting scams to third-party data breaches and information theft. Additionally, companies have less recourse than the consumer in cases of fraud. In some instances, the business can be held liable if a fraud scheme causes damage to customers, partners, shareholders, banks, or other entities.

Let’s discuss what businesses can do to protect themselves from fraud and what it takes to create a solid policy for preventing external and internal threats.

Fraud Risk Assessment

Every company should have a fraud risk assessment that breaks down all the fraud-related risks and threats your company can expect to face. Once a risk is identified in the plan, it can be strategically addressed by creating controls and policies to counteract it.

To get the most out of your fraud risk assessment plan, ensure that every risk/control pair has a stakeholder who will be responsible for its implementation. If you already have a fraud risk assessment in place, make sure it is updated frequently, in accordance with your company’s growth and any new risks that might have cropped up since the last time you updated your assessment.

Protect Your Computer Networks

It’s crucial to consider cyber exposures when creating a fraud prevention plan. Cybercriminals are constantly developing new fraudulent methods and approaches to compromise your systems and networks to access your funds and data illegally.

Let’s break down a few actionable steps you can take to make your digital systems more resilient to fraud and cyber attacks:

• Setting up strict password creation protocols is a low-tech, easy way to make your computers and networks harder to crack. Educating your employees on proper credential management and creating requirements to ensure that they create strong passwords will go a long way toward thwarting cybercriminals. You can also have your employees change their passwords every 60-90 days to limit potential exposures.
• Having a consistent file backup policy can also come in handy. Backing up your files daily or weekly and storing them off-site will insulate you from potential downtime if your system is compromised.
• Using a dedicated computer for banking activity will also make it difficult for insiders to access funds without authorization. Keep in mind that eventually, you’ll need to decommission your workstations, at which time you need to ensure that all sensitive information will be backed up. Be sure to thoroughly clean the machines before recycling them as well.
• It’s also a good idea to scrutinize any online requests that your company receives. This can include internal communication or vendors, partners, and customers requesting sensitive information. Employees must take the time to carefully go through and assess all online requests, even those that seem 100% legitimate. This is especially true for urgent or time-sensitive requests.

If you want to read more about creating a solid cybersecurity plan, read this in-depth guide.

Keep Detailed Records

If your business has an organized record of all sales and business transactions, preventing and discovering fraud will be a lot easier. Reconciling your accounts every day will allow you to spot suspicious transactions immediately.

The more organized your transaction records are, the easier it will be to spot fraudulent payments or prove that you are not liable in case of fraudulent refunds.

Educate Your Team

Preventing fraud needs to be a team-wide effort. Your company’s management should prioritize and develop procedures to reduce fraud risk, but you also need to educate and encourage your employees to get involved.

The first step is training all employees to understand what constitutes fraud, how to recognize the warning signs, and how to report suspicious activity properly.

Consider Employee Background Checks

Avoiding hiring employees who have a potential for fraudulent behavior is a great way to reduce the risk of fraud. Instituting a basic background check can be a great business practice for this person.

A background check allows employers to avoid hiring candidates with a history of problematic behavior. Background checks are vital for positions of trust in which employees can access cash, high-value property, proprietary information, and company accounts.

Learn From Past Incidents

If your business has previously suffered a fraudulent act, your management team should carefully review the incident to ensure that they have a complete understanding of what happened and how to prevent this type of situation from occurring again.

This analysis should take into account where the exposure originated. Was it human error, technology, or your policies and procedures that were at fault?

It’s also crucial to delineate procedure from adherence to process. Even the most advanced anti-fraud measures can be defeated if no one actually follows the prescribed policies.

If you discover that your fraud assessment still has severe weaknesses, it’s good practice to appoint a stakeholder from the management team to take the lead and improve your procedures as soon as possible.

Invest In Insurance

While all these precautions will help significantly reduce the risk of fraud, no measure is foolproof. If the worst happens and a fraudulent attack does happen, the losses can be significant. In such cases, it’s crucial to protect your business with insurance.

Having the right insurance plan in place will help reimburse you for losses incurred. However, fraud is a complex risk, so it’s essential to consider your insurance needs carefully.

The coverage that will respond to the majority of fraud-related exposures is a commercial crime policy. It will protect from loss of money, property, and other assets due to fraud. It will also provide protection against employee theft, forgery, break-ins, and more.

A preferred policy will cover both the crimes committed by your employees, as well as third-party criminal activity that causes losses to your business.

Keep in mind that a crime policy will not cover any business interruption caused by fraud. Sometimes, the disruption and chaos created by fraudulent activity can force a business to shut down for a certain period, so investing in a business interruption policy is a good idea.

This policy ensures you’ll be reimbursed for all the potential expenses of such a disruption (lost revenue, paying your employees and landlord, etc.).

Additionally, a crime policy will not provide coverage if criminals carry out social engineering attacks to illegally obtain funds or information from your company. For most insurers, such attacks fall under the scope of a cyber insurance policy.

This is why it’s also essential to obtain cyber liability insurance to protect you from digital exposures. The right cyber policy will do two things: reimburse you for the losses you suffered from the attack and pay for defense costs and settlements if you’re held liable for any damages suffered by customers due to a data breach.

The best course of action is to contact a trusted insurance broker or agent to discuss your exposures in order to craft the right insurance plan for your needs. This will ensure that your business is fully protected and properly insulated from the expensive reality of fraud.

If you want to better understand your fraud coverage needs, you can contact one of our expert brokers at any time.

The Limits Of Fraud Prevention

The risk of fraud can be significantly reduced using the aforementioned controls, tools, and measures. The ACFE study found that companies employing anti-fraud measures uncovered scams faster and suffered smaller losses. However, fraud prevention has its limits.

Employees need to feel trusted and appreciated. Overbearing fraud control measures may alienate them and make them feel as if they are under constant surveillance. Additionally, customers don’t like it when they need to jump through hoops to access your products and services. For example, completing too many steps to confirm their identity or verify their payments could drive them away.

To adequately protect your business from fraud, it’s crucial to find the right balance between anti-fraud measures and being able to operate functionally. Businesses will inevitably have to accept a certain amount of risk and exposure to ensure that their employees can do their jobs and that they’re providing a positive customer experience.

This is yet another reason why insurance is such a good tool for managing fraud-related losses because it can transfer the risk of fraud to the insurer in exchange for a fixed monthly premium.