Fraud Risk Management Plan: How-to's And Most Common Types

Deliberate falsification of financial records is a significant form of fraud that can put businesses at risk. As fraudsters develop more advanced ways to game the system, you must strengthen your internal fraud risk management strategy to safeguard and keep your financial records safe. This guide walks you through the different types of fraud and tips to prevent them. 

Related: Fraud Risk Management: Are You in Danger of Payroll Fraud? 

CFOs know how important it is to have strong fraud risk management in place to protect the company’s finances. Simple steps like setting clear rules for cash management can help reduce the chances of fraud. Many also use cloud technology or work with outside financial experts to keep an eye on the company’s financial health and spot any risks early on.  

While these are all effective ways to prevent fraud, you still need to be familiar with different fraud schemes to spot the red flags early on. 

Types of Business Frauds 

Below are the most common types of business financial fraud that you should be aware of: 

Payroll Fraud  

Payroll fraud is the type of fraud that takes place when there is a lack of transparency in handling payroll records. Unsurprisingly, it’s also the type of fraud that most organizations could easily become a victim of.  

The good news is that there are ways to mitigate payroll fraud. You can reconcile your balance sheets with your payroll records, utilize automated payroll systems, or outsource payroll services to a third-party financial provider as part of your anti-fraud measures. Due diligence and continuous monitoring will help you maintain control and catch discrepancies early on. 

Additionally, external audits can provide an independent review of your payroll processes, enhancing your overall financial fraud prevention efforts by identifying red flags that may otherwise go unnoticed. 

Financial Statement Fraud  

Financial statement fraud, which involves the intentional misrepresentation of your financial position by understating liabilities or overstating income, assets, and revenues, is another type of fraud you must be wary of. This fraud can make it difficult to assess your organization’s actual financial performance and can lead to misguided business decisions. It can also affect the audit results and make your organization susceptible to getting anything other than a clean report. 

To prevent financial statement fraud, consider having outsourced accountants cross-check your records and perform regular audits. A fresh set of eyes from an external service provider ensures that your financial statements are accurate and free of any fraud schemes. 

This anti-fraud measure helps you make better-informed decisions and avoid potential legal or regulatory issues. 

Multiple payment fraud  

When we say multiple payment fraud, this often refers to that instance when your bookkeeper or the person taking charge of your financial resources' issues more than one check when there is just a single check requirement. The second check goes straight to the bookkeeper’s personal account. 

This kind of fraud could be a little difficult to catch. To prevent multiple payment fraud, implement a system where two or more individuals are responsible for managing financial records. This segregation of duties creates a system of checks and balances. Additionally, hiring a third-party financial auditor to review your records periodically can help detect fraud early and ensure that no single person has too much control over financial transactions.  

Asset Misappropriation Fraud  

Physical burglaries are parallel to asset misappropriation frauds in businesses. This type of fraud is stealing a company’s assets or property for personal gain.  

Asset misappropriation is linked to insider fraud since it is a breach of the firm’s trust. To steal funds, they forge checks and write them for themselves, which do not reflect on the books.  

To protect against asset misappropriation, perform regular audits and physical inventory checks. Implementing clear internal control systems can also help you track and manage company assets more effectively. Regular fraud risk assessments will allow you to identify vulnerabilities and put necessary controls in place to prevent theft. 

Read: Fraud Risk Management: Addressing the Common Types of Internal Fraud 

Affinity fraud  

Another type of fraud is one that is committed right under your nose by someone you trust. This person could be a relative or a very close friend. It usually happens when you entrust all of the check payments and cash management tasks to someone you know personally, which can open the door to fraudulent activities like identity theft or other forms of financial abuse. 

To avoid this type of fraud, do not rely on the ties of family and friendship where your business finances are concerned. Rather, hire a professional financial services provider and instill a check-and-balance policy to keep things secure and continuously monitor for any signs of fraud. You could also run an internal financial audit to ensure the accuracy of your financial records. 

Why You Need a Fraud Prevention Plan 

Fraud can seriously hurt your business, leading to financial loss and damage to your reputation. Putting a solid fraud prevention plan in place can protect you from these risks. 

Your plan should include regular fraud risk assessments, strict internal controls, and regular audits. It’s also important to build a company culture that promotes honesty and transparency. Hiring outside experts to review your financial records is another way to ensure everything is in order and reduce the risk of fraud. 

Read Next: 4 Ways to Use Generative AI to Prevent Fraud 

Practical Steps to Prevent Fraud 

Now that you know the common types of fraud, here are some easy steps you can take to protect your finances: 

1. Have Clear Rules 

• Make sure no one person handles all parts of a big job like managing money. 

• Check your way of doing things often to keep them up t date. 

• Do background checks before hiring new employees to help prevent identity theft or financial fraud. 

2. Regularly Monitor Financial Transactions 

• Use software that tracks all transactions and sends alerts if something looks suspicious, helping you spot red flags early. 

• Do regular audits to make sure everything is in order and aligned with your fraud prevention strategies. 

3. Educate and Train Employees 

•  Provide regular training on fraud awareness and prevention for all employees. 

• Create a clear communication channel for reporting suspicious activities or potential fraud. 

4. Use Technology for Fraud Detection 

• Use cloud-based accounting systems and fraud detection software for real-time monitoring. 

• Utilize multi-factor authentication to protect access to your important systems, including your bank account. 

• Keep your software and systems updated to guard against hackers and fraud schemes. 

• Use encryption and secure backups to protect your data. 

5. Set Up a Whistleblower System 

• Have a confidential way for employees to report bad behavior or fraud. 

• Make sure whistleblowers are safe and supported when they report issues. 

6. Stay Up to Date 

• Keep up with new fraud tricks and adjust your strategies as needed. 

• Talk to other businesses and industry groups to learn best practices to avoid fraud. 

7. Get Outside Help 

• Reach out to an outsourcing provider to outsource key tasks like payroll, bookkeeping, or accounting to help reduce the risk of fraud. 

• Use their advice to improve your fraud prevention efforts. 

 The Bottom Line 

Fraud is a serious matter. A well-structured and organized fraud risk management policy diminishes your chances of losing an enormous amount of money due to erroneous number-crunching or inside job. 

Aside from a fraud risk management plan, having a third-party assess your financial records is a way to go. 

Hire Trustworthy Partner 

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This post was first published on 08 June 2020 and edited on 14 November 2024. Edited by: Angelica Garcia