An insider’s look at the importance of internal fraud prevention and monitoring tools

Internal fraud defined

Internal fraud is any attempt to commit theft, embezzlement or misappropriation of company assets by employees or other individuals with access to the organization’s resources. It can also include fraudulent behavior, such as kickbacks or bribes, resulting in financial gain for the individual at the company's expense.

Internal fraud is a serious problem for businesses of all sizes in all industries. According to the Association of Certified Fraud Examiners (ACFE), it costs organizations an estimated 5% of their annual revenues. Small businesses are especially vulnerable, as they often lack the resources to effectively prevent and detect fraud. However, in today’s environment of ubiquitous social media and global exposure, fraud is impacting all organizations, stretching beyond just financial damage.

Why it occurs

Internal fraud occurs for many reasons. Often, it’s simply a matter of opportunity – employees who have access to sensitive information or large amounts of cash may be tempted to misuse those resources for personal gain. In other cases, internal fraud may be motivated by revenge or retribution against the company. Finally, some individuals may commit fraud simply because they feel entitled to do so or believe they will not get caught.

Whatever the reason, businesses need to be aware of the risk of internal fraud and take steps to prevent it.

Why it should be prevented

The many benefits of implementing internal fraud prevention and monitoring tools include:

• Reduced costs: By catching fraud early, companies can avoid the costly investigations and litigation that often follow.
• Improved employee morale: Employees appreciate working for a company that’s proactive about preventing fraud. This can lead to improved morale and productivity.
• Better risk management: By identifying potential risks early, companies can take steps to mitigate them before they result in actual losses.
• Adhering to best industry and business practices: Implementing internal fraud prevention and monitoring tools gives companies and their employees peace of mind knowing they’re doing everything possible to prevent fraudulent activity and follow best business practices.

Given the importance of protecting your business from fraud, it’s essential to invest in a comprehensive internal fraud prevention and monitoring tool.

How to prevent it

Although fraud cannot be fully prevented, businesses can take several key steps to help minimize its impact.  One of the most important is to implement internal fraud prevention and monitoring tools that, when strategically deployed, can help organizations keep tabs on their finances and spot suspicious activity.

Common internal fraud prevention and monitoring actions include:

• Conducting fraud audits: Regularly auditing your financial records, as well as performing fraud-internal controls tests, can help catch errors or discrepancies (including what could be signs of fraud.) These tests are designed to verify that your internal controls and procedures are properly followed and measured. 
• Budgeting and forecasting: Having a clear picture of your organization's financial health can make it easier to spot irregularities that might be caused by fraud. Additionally, other related activities (e.g., tracking employee expenses) can help identify any unusual or excessive spending patterns that could indicate fraud.
• Establishing and maintaining a whistleblowing program: When it comes to fraudulent behavior, employees are often the first line of defense. Organizations rely on trust (on the part of employees, vendors, clients) to achieve their mission. A whistleblowing policy can help protect this trust by providing a mechanism for reporting and investigating allegations of misconduct. The policy should include a robust mechanism to investigate potential fraud/allegations thoroughly and take appropriate disciplinary action against those involved. A thorough investigation will help prevent future incidents and send a message that fraud will not be tolerated in the organization.
• Performing data analytics: Analysis of your organization's data can help reveal patterns or trends that could indicate fraudulent activity.

Companies may have a different risk matrix – which reinforces how critical it is to engage professional fraud specialists to assist in fraud and risk management.  Common fraud prevention and monitoring tools include:

• Bank account reconciliation: This process helps ensure that all transactions are accounted for and that there are no unauthorized withdrawals from bank accounts.
• Inventory counts: Periodic counts of inventory can help catch such issues as employee theft or fraudulent customer returns.
• Employee background checks: Checking the backgrounds of new employees can help reduce the risk of hiring someone with a history of fraud or other criminal activity.
• Access control measures: Limiting access to sensitive areas or information can help prevent and deter fraud.
• Fraud detection software: This type of software can be used to scan financial records for signs of fraudulent activity.
• Cybersecurity readiness and digital risk exposure: Employees should be aware of the sensitive nature of data and companies should design their systems accordingly. With an increasing focus on data privacy and cybersecurity, businesses must take proactive steps to protect themselves from any kind of internal or external threat by using reliable tools designed for this purpose.

The tools described above shouldn’t be applied blindly, but instead should be based on the company’s risk profile as well as the costs and benefits analysis.

A qualified fraud risk specialist can design and implement an effective and efficient program (or improve an existing one) that’s right for a specific organization. 

How Mazars can help

Our approach is to provide strategic guidance and offer comprehensive solutions tailored to your organization to address allegations of fraud. Our goal is to help clients make informed, fact-supported decisions that further minimize losses, disruptions, risk and exposure.

We help clients by:

• Providing assessments tailored to an organization’s situation
• Designing internal control systems that help identify any fraud or financial risk
• Investigating relevant facts using the latest in digital forensics
• Monitoring our findings and reaching conclusions by collaborating and exploring fact patterns
• Presenting practical solutions to:
  • Strengthen internal control systems
  • Minimize the likelihood of future fraudulent activity

We pride ourselves on building strong relationships and becoming your trusted advisor by delivering expertise and high-quality results.

Contact us today to discuss comprehensive solutions for your organization.