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The ABCs of Business Fraud Prevention

Author: Christopher D. Warren|March 15, 2024

What Is Business Fraud?

The ABCs of Business Fraud Prevention

What Is Business Fraud?

The ABCs of Business Fraud Prevention in front of a secured lock.

Business fraud can result in enormous financial losses, as well as reputational harm and legal liability. Businesses lose a staggering five percent of revenue to fraud each year, according to the Association of Certified Fraud Examiners (ACFE) 2022 Report to the Nations on Occupational Fraud and Abuse. This is why business fraud prevention is pertinent.

Unfortunately, businesses of all sizes are vulnerable to fraud. Many companies, particularly small and mid-sized organizations, also lack strong business fraud prevention protocols, leaving them exposed to both internal and external threats. By taking measures to mitigate the risk of fraud, companies can protect their bottom line, safeguard their reputation, and create a productive work environment.

The first step to preventing business fraud is knowing what to look for. In basic terms, “fraud” is any activity that relies on deception to achieve a gain. In the business context, fraud can involve a wide range of misconduct, including money laundering, payroll fraud, asset misappropriation, intellectual property theft, and phishing attacks. While fraud can impact any business, industries with the most reports of business fraud include construction, real estate, and utilities.

Perpetrators can come from both inside or outside of your organization and may include employees, customers, or suppliers. In many cases, however, fraud is an inside job. Consider these startling statistics: 75 percent of employees report having stolen at least once from their employer, while 37.5 percent report having stolen at least twice from their employer. Not surprisingly, approximately one-third of all business bankruptcies are caused by employee theft.

Nearly half of all business frauds are attributed to a lack of internal controls or the ability of perpetrators to skirt existing controls. Even more alarming, a typical fraud lasts 12 months before being detected.

The fact is that many businesses are simply unprepared. This is particularly true for small and mid-sized businesses, which tend to be the most frequent victims. In any case, protecting your business from fraud requires a proactive approach. Below are a few key suggestions:

  • Conduct Due Diligence: Unfortunately, it is unwise to take people at their word. Whether it’s a new vendor or a new hire, verify their qualifications and check their references. When individuals are handling finances or other sensitive data, a background check is also wise.
  • Incorporate Fraud Detection Procedures: There are many different policies and procedures that businesses can put in place to detect fraud. Examples include anonymous reporting systems, annual external audits, and banking alerts that flag questionable transactions.
  • Train Employees: Your staff is one of the best defenses against business fraud. Given that fraudsters often rely on company insiders to provide access, train your employees regarding the importance of following physical and data security procedures. Employees should also be able to spot common frauds and be aware of the company’s procedures for reporting suspicious activity.
  • Establish Checks and Balances: Requiring detailed documentation can go a long way. Fraud is also less likely to occur when fiscal duties are divided among several employees. Additionally, financial transactions should require the approval of more than one person.
  • Don’t Ignore Red Flags: As the saying goes, “If something sounds too good to be true, it probably is.” If something doesn’t sound right, ask questions. If you suspect fraudulent activity, be proactive and conduct an investigation. In most cases, the quicker you act, the easier it is to mitigate the damage.

If you suspect that you may be a victim of business fraud, it is important to be proactive to protect the primary and most important going concern; your company. Your first response should be to safeguard your accounts from further damage (lock accounts, change passwords, file fraud reports, etc.) and then collect any documentation to support your claims.

Your next steps should include consulting your insurance policies to identify any coverage that may be available or providing these policies to an attorney for their review and advice regarding the protections you may have concerning any losses to your business. Experienced legal counsel can also help you minimize the fallout from business fraud by protecting your legal rights.

At Scarinci Hollenbeck, our multi-disciplinary team of business attorneys can help with the myriad of issues that can arise, such as assisting with crisis management, communicating with regulators, pursuing insurance coverage, and recovering your losses through a well-thought-out and cost-effective litigation strategy. Equally important, we can also work with you and your business to strengthen your corporate governance practices and business fraud prevention protocols going forward.

The ABCs of Business Fraud Prevention

Author: Christopher D. Warren
The ABCs of Business Fraud Prevention in front of a secured lock.

Business fraud can result in enormous financial losses, as well as reputational harm and legal liability. Businesses lose a staggering five percent of revenue to fraud each year, according to the Association of Certified Fraud Examiners (ACFE) 2022 Report to the Nations on Occupational Fraud and Abuse. This is why business fraud prevention is pertinent.

Unfortunately, businesses of all sizes are vulnerable to fraud. Many companies, particularly small and mid-sized organizations, also lack strong business fraud prevention protocols, leaving them exposed to both internal and external threats. By taking measures to mitigate the risk of fraud, companies can protect their bottom line, safeguard their reputation, and create a productive work environment.

The first step to preventing business fraud is knowing what to look for. In basic terms, “fraud” is any activity that relies on deception to achieve a gain. In the business context, fraud can involve a wide range of misconduct, including money laundering, payroll fraud, asset misappropriation, intellectual property theft, and phishing attacks. While fraud can impact any business, industries with the most reports of business fraud include construction, real estate, and utilities.

Perpetrators can come from both inside or outside of your organization and may include employees, customers, or suppliers. In many cases, however, fraud is an inside job. Consider these startling statistics: 75 percent of employees report having stolen at least once from their employer, while 37.5 percent report having stolen at least twice from their employer. Not surprisingly, approximately one-third of all business bankruptcies are caused by employee theft.

Nearly half of all business frauds are attributed to a lack of internal controls or the ability of perpetrators to skirt existing controls. Even more alarming, a typical fraud lasts 12 months before being detected.

The fact is that many businesses are simply unprepared. This is particularly true for small and mid-sized businesses, which tend to be the most frequent victims. In any case, protecting your business from fraud requires a proactive approach. Below are a few key suggestions:

  • Conduct Due Diligence: Unfortunately, it is unwise to take people at their word. Whether it’s a new vendor or a new hire, verify their qualifications and check their references. When individuals are handling finances or other sensitive data, a background check is also wise.
  • Incorporate Fraud Detection Procedures: There are many different policies and procedures that businesses can put in place to detect fraud. Examples include anonymous reporting systems, annual external audits, and banking alerts that flag questionable transactions.
  • Train Employees: Your staff is one of the best defenses against business fraud. Given that fraudsters often rely on company insiders to provide access, train your employees regarding the importance of following physical and data security procedures. Employees should also be able to spot common frauds and be aware of the company’s procedures for reporting suspicious activity.
  • Establish Checks and Balances: Requiring detailed documentation can go a long way. Fraud is also less likely to occur when fiscal duties are divided among several employees. Additionally, financial transactions should require the approval of more than one person.
  • Don’t Ignore Red Flags: As the saying goes, “If something sounds too good to be true, it probably is.” If something doesn’t sound right, ask questions. If you suspect fraudulent activity, be proactive and conduct an investigation. In most cases, the quicker you act, the easier it is to mitigate the damage.

If you suspect that you may be a victim of business fraud, it is important to be proactive to protect the primary and most important going concern; your company. Your first response should be to safeguard your accounts from further damage (lock accounts, change passwords, file fraud reports, etc.) and then collect any documentation to support your claims.

Your next steps should include consulting your insurance policies to identify any coverage that may be available or providing these policies to an attorney for their review and advice regarding the protections you may have concerning any losses to your business. Experienced legal counsel can also help you minimize the fallout from business fraud by protecting your legal rights.

At Scarinci Hollenbeck, our multi-disciplinary team of business attorneys can help with the myriad of issues that can arise, such as assisting with crisis management, communicating with regulators, pursuing insurance coverage, and recovering your losses through a well-thought-out and cost-effective litigation strategy. Equally important, we can also work with you and your business to strengthen your corporate governance practices and business fraud prevention protocols going forward.

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