Fraud Risk Management: Addressing the Common Types of Internal Fraud

The volatility in today’s economic and business landscapes has increased the complexity of risks that businesses face. Increasing tariffs, political instability, technological disruptions, and other shifts have transformed the role of the CFO, making them less of a number-cruncher and more of a strategist. In this regard, CFOs should be involved in internal fraud risk management.

We have written about how to assess and manage your financial risks in the past, and for this week, we focus on internal fraud risks that businesses face. 

These can be caused by factors within your business, such as risks related to humans (e.g., turnover, operational stoppage), technology (e.g., damage to equipment, risks associated with the use of outdated technology), and cash flow, among others.

Related: How to Know if you Need a Forensic Accountant

Common Types of Internal Fraud

Some of the most common types of internal fraud committed by employees are as follows: 

• Misappropriation of Assets and Resources

This includes check forgery; payroll fraud; theft of cash, inventory, or stock; and theft of services. Some employees may engage in fraudulent invoicing (i.e., charging for products or services that were not delivered) and check tampering (i.e., writing checks to fake payees and collecting the funds thereafter).

• Manipulating Financial Statements

This involves misrepresenting figures on the company’s financial statement to create a financial opportunity for an entity, an individual, or a group of people. Stock price manipulation, disbursing larger sums of year-end bonuses, and granting favorable loan terms, fall under this category.

• Bribery and Corruption

This includes fraudulent schemes such as getting kickbacks, channeling funds to shell companies, manipulating contracts and giving bribes to influence decision-making, or substituting quality supplies or company equipment with inferior ones. 

To mitigate these, your organization should have a system to manage and address fraud risks.

What activities should be included in your fraud risk management process?

First, it’s important to determine the fraud risks that are inherent in your operational and financial processes. Using tools such as FMEA and SWOT analysis and other risk identification techniques can be helpful at this stage.

In a similar vein, identify and evaluate your existing internal controls for the prevention and detection of risk. Review these controls and how effective they are in addressing the fraud risks that you have identified. If these controls are inadequate or ineffective, identify what the residual risks can be. 

Related: How to Improve Internal Control for Your Growing Business

If there are no existing controls in place, you can use the information you have collected in developing a comprehensive plan for fraud risk management. Identify who should be responsible for 

1. addressing, and if possible, eliminating, the identified risk,
2. formulating and implementing processes to monitor and report the risk, and
3. developing better controls for risk mitigation, as needed.

Policies related to fraud risk management should be assessed and updated regularly to reflect the ongoing changes happening within the business. As new initiatives and operational processes are implemented, controls should be introduced, and fraud risks re-assessed.

Managing the Business Risk of Fraud

All organizations should develop a fraud risk assessment process to mitigate the risk of fraud. Nevertheless, regardless of the internal controls that you have established in your company, the success of your fraud management initiatives largely depends on your corporate culture.

Here are some effective strategies that your senior management can employ: 

• Promoting the value of strong ethical behavior, from top to bottom of the organization
  
  
• Strictly implementing all established anti-fraud policies and procedures
  
  
• Investing in the right analytics tools and human resources to adequately respond to fraud risks
  
  
• Building mechanisms to allow fraud whistleblowers to communicate and report fraudulent activities in a timely and confidential manner
  
  
• Establishing a robust risk management system and maintaining a healthy internal control environment within the organization 

Read Next: Black Swan Scenarios: Your CFO and Business Risk Management

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