20 Fraud Prevention Tips to Help Protect Your Business

Thoughtware Alert Nov 16, 2020
Forensics, Investigation, Litigation

With this week being International Fraud Awareness Week, we thought it was a great time to share our top 20 fraud prevention tips. These have been cultivated from the decades of experience BKD’s forensics team has in conducting fraud investigations and helping clients mitigate fraud risk.

  1. Confidential Hotline – Did you know this is the single most cost-effective anti-fraud action you can take? Tips via hotlines are the number one way that frauds are detected, according to the ACFE 2020 Report to the Nations, and most tips come from employees. We encourage you to set up a confidential hotline operated by a third party and advertise it internally to all of your employees.
  2. Fraud Awareness Training – Lower losses and shorter duration can correlate to awareness training for employees. Organizationwide awareness is critical, so turn all your employees and managers into fraud detectors and take advantage of all those eyes and ears.
  3. Vendor Controls – Vendor fraud is very common across all industries due to the large number of payments going out to different companies and entities—everyone has vendors/suppliers, so it’s an easy place to perpetrate fraud. Here are a few items to consider:
    1. Take control over selection of new vendors:
      1. Who can select?
      2. How are they selected?
    2. Perform due diligence on new vendors. Ask yourself:
      1. Is the vendor real?
      2. Is their pricing reasonable?
      3. Is the vendor related to an employee?
    3. Periodically reassess vendor relationships.
    4. Reduce or eliminate conflicts of interest.
  4. Solid Budget-to-Actual Process – Variances can really tell a story if budgets are done well and variances are dutifully and diligently followed up on. Consider the following:
    1. Is your budget reliable?
    2. Are you examining variances monthly?
    3. Understand what is really causing variances.
    4. Identify and follow up on any unusual trends.
  5. Use Bank Account Controls – Financial institutions have some great resources available to help you prevent financial transactions from leaving your bank accounts—an ounce of prevention is worth a pound of cure.
    1. Positive pay:
      1. Protects your bank account against counterfeit checks.
      2. Protects you against schemes you have no other way to prevent.
      3. Over the past few years, most corporate account holders have implemented this.
    2. Automated Clearing House (ACH) block and filter:
      1. Corporate account takeover is the latest fraud plague.
      2. If you don’t use ACH transactions, block them with your bank.
      3. If you do use ACH transactions, place restrictions with your bank.
      4. Protect your credentials.
  6. Log Customer Complaints – Don’t assume your customers are just complaining to get something out of you or get a concession. They may notice things you don’t, and when you see a pattern of complaints showing up, it’s time to dig in deep. Patterns in complaints are seldom recognized until it’s too late. Pay attention to complaints about payments, timeliness of posting, and statements.
  7. Implement Good HR Practices – Conducting checks on candidates before they walk in the door can go a long way in preventing fraud. If they are never employed, they never commit occupational fraud. Also, having exit interviews can be a very useful tool in finding out about fraud, waste, and abuse in your organization. Without the interview, exiting employees may not bother to tell you what they know. These checks include:
    1. Background checks.
    2. Credit checks.
    3. Performance evaluation processes.
    4. Exit interviews.
  8. Inventory Control – Sloppiness in inventory controls can leave you vulnerable to shrink. Be especially vigilant with small, high-value inventory or valuable scrap. Here are a few things you can implement to enhance your inventory controls:
    1. A reliable inventory system.
    2. Control over inventory adjustments.
    3. Strategically placed cameras.
    4. Cycle counts and test counts.
    5. Physical inventory adjustment follow-up.
  9. Review of Bank Statements & Canceled Checks – This is one of the easiest, yet most overlooked, fraud detection controls. This can prevent and detect many different types of fraud, and it doesn’t have to be done every month to be effective—although we of course recommend a monthly review if possible. Review:
    1. Bank statements for ATM transactions, counter withdrawals, unusual ACH transactions, credit card payments, etc.
    2. Canceled checks for unusual payees, endorsements, and amounts.
  10. Implement Mandatory Vacations – You know those employees who never take a vacation day, and if they do, they are checking in the whole time? It may not be because they are super dedicated. Many problems are identified during perpetrator vacations, as someone must fill in for them to perform their duties. Implementing mandatory vacations (or job rotations) can help identify fraudulent activities.
  11. Credit Card & Expense Reimbursement Policies – Purchase and credit cards are a very common tool for committing fraud. They are convenient and, if monitored, can be very useful. However, having strong controls in place is essential to reducing your fraud risk. Start with a clearly defined policy on what is and is not acceptable:
    1. Card use for “business purposes” is not good enough.
    2. What types for expenses do you really want to be paying?
    3. What types of expenses are not acceptable?
    4. What documentation is required?
    5. Soft expenses need better documentation of business purpose and who was present (meals and entertainment, sporting events, etc.).
    6. Policies need more details and enforcement.
  12. Review of Credit Cards & Expenses – Similar to tip 11 above, diligent review of credit cards and expenses is needed. This task needs to be assigned to the right person who needs support to perform the appropriate level of review.
  13. Fraud Risk Assessment – This is like going to the doctor for a checkup. It’s not something you need to do all the time, but it’s a great idea to do annually or biannually. Your company or organization changes, and with the changes come different risks. A periodic fraud risk assessment will help you adapt to those changes and allow you to understand your fraud risks and help you focus your efforts. This assessment should be performed by someone who looks at fraud issues on a regular basis.
  14. Internal Audit – These are the watchdogs for the company and can come in both in-house and outsourced varieties. It’s critical they report to the right individual(s) to maintain independence. Internal auditors should be independent of management and accounting. Internal auditing may not be feasible for all organizations; if not, have “tire-kicking” procedures performed by someone. Consider doing one or two high-risk areas per year.
  15. Data Mining & Continuous Auditing – 100 percent testing of transactions is an efficient and effective means to find anomalies that could be leading indicators of fraud, waste, and abuse, especially transactions related to accounts payable and vendors. Data mining can help you identify patterns indicative of fraud schemes and find information you’ll never find by looking at documents.
  16. Management Reviews – Everyone is busy, but having management set aside specific time to review these areas can go a long way in reducing your fraud risk.
    1. Review key financial reports, including:
      1. A/P check register
      2. Payroll detail report
      3. Write-offs
    2. Determine if reports are appropriate for board-level review.
    3. Ask questions.
    4. Follow up when something doesn’t seem right.
    5. Establish “perception of detection.”
  17. Segregation of Duties – This can be a hard one for small organizations or growing organizations whose controls have not kept pace with their growth. This is an old tip that’s been around for a long time, but it’s just as critical today as any time in the past.
    1. A few to focus on (there are many more):
      1. A/P access to signed checks.
      2. Internal delivery of checks.
      3. A/P clerks who can set up vendors.
      4. Payroll clerks who can set up new employees.
  18. Code of Conduct – These seem like “soft” controls, but it is critical that a company or organization has these in place so employees cannot claim “ignorance” that what they were doing was wrong. Policies to consider implementing include:
    1. Anti-fraud policy.
    2. Conflict of interest policy.
    3. Policy related to gifts and gratuities.
    4. Consider annual acknowledgment and disclosure of:
      1. Any awareness of inappropriate activity.
      2. Any conflicts of interest with vendors or customers.
  19. Create the Right Culture – Similar to establishing a code of conduct, this tip may seem “soft,” but it is a critical component to fraud prevention. If leadership demands and displays integrity and transparency, it typically permeates through a company or organization.
    1. Tone is set at the top – Management must “walk the walk.”
    2. Create a positive workplace environment.
    3. Establish a culture of honesty and high ethics.
    4. Put an emphasis on doing the right thing.
  20. Prosecute – Only about six out of 10 fraud victims actually prosecute, leaving four perpetrators free to strike again. A lack of enforcement undermines your anti-fraud efforts, so making an example of those who steal helps set the tone for other would-be offenders while leaving a criminal record for the perpetrator.

Decades of experience also have taught us that even if you implement all the tips above, you may still become a fraud victim. Fraudsters are infinitely creative with their schemes, and detecting or preventing those schemes is a never-ending task. That said, when taken together, these top 20 tips can go a long way in helping you mitigate your fraud risk.

For more information, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.

 

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