The ABCs Of Business Fraud Prevention – White Collar Crime, Anti-Corruption & Fraud

Business fraud can result in enormous financial losses, as well
as reputational harm and legal liability. Businesses lose a staggering
five percent of revenue to fraud each year, according to the Association of
Certified Fraud Examiners (ACFE) 2022 Report to the Nations on
Occupational Fraud and Abuse. This is why business fraud prevention
is pertinent.

Unfortunately, businesses of all sizes are vulnerable to fraud.
Many companies, particularly small and mid-sized organizations,
also lack strong business fraud prevention protocols, leaving them
exposed to both internal and external threats. By taking measures
to mitigate the risk of fraud, companies can protect their bottom
line, safeguard their reputation, and create a productive work
environment.

The first step to preventing business fraud is knowing what to
look for. In basic terms, “fraud” is any activity that
relies on deception to achieve a gain. In the business context,
fraud can involve a wide range of misconduct, including money
laundering, payroll fraud, asset misappropriation, intellectual
property theft, and phishing attacks. While fraud can impact any
business, industries with the most reports of business fraud
include construction, real estate, and utilities.

Perpetrators can come from both inside or outside of your
organization and may include employees, customers, or suppliers. In
many cases, however, fraud is an inside job. Consider these
startling statistics: 75 percent of employees report having stolen at least once from their
employer, while 37.5 percent report having stolen at least twice
from their employer. Not surprisingly, approximately one-third of
all business bankruptcies are caused by employee theft.

Nearly half of all business frauds are attributed to a lack of
internal controls or the ability of perpetrators to skirt existing
controls. Even more alarming, a typical fraud lasts 12 months
before being detected.

The fact is that many businesses are simply unprepared. This is
particularly true for small and mid-sized businesses, which tend to
be the most frequent victims. In any case, protecting your business
from fraud requires a proactive approach. Below are a few key
suggestions:

• Conduct Due Diligence: Unfortunately, it is
  unwise to take people at their word. Whether it’s a new vendor
  or a new hire, verify their qualifications and check their
  references. When individuals are handling finances or other
  sensitive data, a background check is also wise.

• Incorporate Fraud Detection Procedures: There
  are many different policies and procedures that businesses can put
  in place to detect fraud. Examples include anonymous reporting
  systems, annual external audits, and banking alerts that flag
  questionable transactions.

• Train Employees: Your staff is one of the best
  defenses against business fraud. Given that fraudsters often rely
  on company insiders to provide access, train your employees
  regarding the importance of following physical and data security
  procedures. Employees should also be able to spot common frauds and
  be aware of the company’s procedures for reporting suspicious
  activity.

• Establish Checks and Balances: Requiring
  detailed documentation can go a long way. Fraud is also less likely
  to occur when fiscal duties are divided among several employees.
  Additionally, financial transactions should require the approval of
  more than one person.

• Don’t Ignore Red Flags: As the saying
  goes, “If something sounds too good to be true, it probably
  is.” If something doesn’t sound right, ask questions. If
  you suspect fraudulent activity, be proactive and conduct an
  investigation. In most cases, the quicker you act, the easier it is
  to mitigate the damage.

If you suspect that you may be a victim of business fraud, it is
important to be proactive to protect the primary and most important
going concern; your company. Your first response should be to
safeguard your accounts from further damage (lock accounts, change
passwords, file fraud reports, etc.) and then collect any
documentation to support your claims.

Your next steps should include consulting your insurance
policies to identify any coverage that may be available or
providing these policies to an attorney for their review and advice
regarding the protections you may have concerning any losses to
your business. Experienced legal counsel can also help you minimize
the fallout from business fraud by protecting your legal
rights.

At Scarinci Hollenbeck, our multi-disciplinary
team of business attorneys can help with the myriad of issues that
can arise, such as assisting with crisis management, communicating
with regulators, pursuing insurance coverage, and recovering your
losses through a well-thought-out and cost-effective litigation
strategy. Equally important, we can also work with you and your
business to strengthen your corporate governance practices and
business fraud prevention protocols going forward.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.