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Is Your Business a Sitting Duck? Stop Fraud Before it Happens
Corporate fraud is a growing problem. According to a recent PwC report, 45% of
businesses in the US suffered some type of fraud within the past two years. Whether it’s
an internal accounting scam or data theft by outsiders, fraud can severely impact a
businesses’ bottom line and damage its reputation. Detecting fraudulent activity and
recovering lost funds is becoming increasingly difficult as criminals become savvier. In
fact, most instances are detected only by chance.
Don’t be a sitting duck. Be proactive and stop fraud before it occurs by following these
risk management practices:
Due Diligence: Before signing on the dotted line, make sure you know with whom
you’re dealing. Shell companies, or fictitious entities created for the sole purpose of
committing fraud, are rampant and dangerous. Therefore, do a thorough check of
databases to verify that the company has an assigned tax ID number, address, and
phone number. Next, perform a criminal background check to uncover any past issues
that may pose a risk including bankruptcy, complaints with the Better Business Bureau,
or arrests for criminal fraud.
Look for Red Flags: There are several red flags to look for when researching a
company. Is the business active? Are stated facts consistent with other sources of
information? If not, then beware. It’s important to note that there isn’t just one red flag
that confirms significant risk of fraud. Rather, it’s an accumulation of flags or patterns.
When one warning sign surfaces, others often follow.
Use Data Mining: Data mining, which refers to the targeted analysis of data, not only
helps businesses identify trends, but it can also detect fraud. For example,
organizations can analyze vendor payments to establish benchmarks, which can then
be used as guidelines to pinpoint irregular or inconsistent payments. While one
anomalous transaction isn’t evidence of fraud, a pattern of inconsistent payments could
indicate trouble ahead.
Create a System of Awareness: Every type of business is susceptible to fraud,
whether it’s a large enterprise or a mom-and-pop store. It’s important to create a system
of awareness starting at the top level of management. Written procedures are critical to
ensure internal consistency and adherence to anti-fraud work practices and policies.
What’s more, educate your employees on the proper handling of sensitive company
information such as financial, personnel, and consumer data. While your employees are
often the most vulnerable, they are also your first line of defense.
Continuous Auditing: Even after contracts are signed, businesses need a system in
place to continually monitor vendors for events that indicate potential risks, such as
Chapter 11 bankruptcy filings. In addition, regular reviews of accounts payable invoices
and purchase orders can help detect fraud or reveal suspicious behavior.