Fraud Risk Management: Addressing the Common Types of Internal Fraud

The volatility in today’s economic and business landscape 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 must be taking an active role in the internal fraud risk management of your company. We have written about how to assess and manage your financial risks in the past and for this present time, 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humans (e.g., turnover, operational stoppage), technology (e.g., damage to equipment, risks associated with the use of outdated technology) and cash flow, among others. 

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. 

Related: How to Know if you Need a Forensic Accountant 

• 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. 

How to conduct 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.  

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  

• Addressing and if possible, eliminating, the identified risk, 
• formulating and implementing processes to monitor and report the risk and 
• 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 reassessed. 

Read: How to Improve Internal Control for Your Growing Business 

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. 

The Bottom Line 

The importance of mitigating fraud is so vital to the company. Hence as a CFO you should plan out different strategies and activities to mitigate fraud in your organization, as a result this will definitely help your organization not to be at risk to fraudster. In addition, the above mentioned are the list of things that can help you detect the common types of fraud. 

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

Find Comprehensive Support for Your CFO 

Discover how D&V Philippines can get you the best finance and accounting talents to support your finance function. Schedule a consultation today to learn how we can partner with you to drive your business forward.  

You can also download our free guide, Premier CFO Solutions, to learn about the solutions that we provide. Click the link below to get access to the document. 

This post was first published 18 November 2019 and edited 23 October 2023. Edited by: Angelica Garcia