Whether you are a part of a large corporation or a small business, fraud can have a big impact. Financial loss is the top concern and top of everyone’s minds, but there are a host of other problems that can damage your business. These issues highlight the importance of fraud prevention strategies to avoid these problems now or in the future.
Direct financial loss
Financial loss comes in many forms and is often the first concern for business owners encountering fraud. The losses range from theft of funds, to awarding contracts to expensive providers, or physical losses of inventory.
Some are obvious, but many instances of fraud are difficult to fully quantify. For example, procurement fraud – one of the top three common types of fraud – it difficult to quantify as it is hard to determine how much the company would have saved had they chosen the correct vendor. Fraud can also go undetected for several years, making it difficult to accurately track financial loss over a long period of time.
Especially in cases where fraud goes undetected, the financial loss can be detrimental to a business, resulting in a long recovery or in the worst cases – no recovery at all. When fraud is detected, there are further costs in bringing the perpetrator to justice and preventing the same problems in the future. Businesses without the proper controls in place can fall victim to fraud, and see the demise of the business as a result.
Morale
Finances are not the only losses when fraud is involved – company morale also suffers. Awareness of fraud in a company impacts all employees: some will feel betrayed by their colleagues, causing a lack of trust and air of tension. Employees may feel guilty for not discovering problems earlier, or fear their actions will be under increased scrutiny. Collaboration becomes more difficult at a time when it is needed the most.
This problem is exacerbated when the fraud is committed by senior managers – as it often is. Trust in authority diminishes, and with it, trust in the organization as a whole. Managers should represent the best of a company. If that perception disappears, employee morale is damaged.
Trust is vital to the smooth functioning of a company. A lack of trust can result in lower productivity, a focus on self-preservation rather than collaboration, and increased conflicts amongst employees. These problems extend past the business, impacting clients or contractors, and making them incredibly difficult to rectify.
Legal and financial problems
Once a company has experienced fraud, long term financial losses are on the cards. Financial services become more costly due to the perceived risks and the extra checks required to ensure the same mistakes do not happen again.
Companies that need capital in the form of loans or from investors will struggle to secure funds. This becomes imperative if capital is required to keep your business afloat after mass losses due to fraud. Your business is seen as a liability, and that can be detrimental to your company’s future.
Legal issues are also a concern. Not only does the company have to pursue legal action against the perpetrator – clients or investors affected by the financial losses may pursue legal action against you for lacking the proper preventative controls. These legal issues can plague a company for years and extend the costs of fraud long past the initial crime.
Smaller businesses are typically more likely to face these issues due to a lack of support and fewer fraud management controls. Large companies may have the tools to counteract these negative problems, but smaller companies do not. They often struggle or may be forced to close because of it.
Credibility
Fraud taints a business’s reputation. Once the public knows a company is vulnerable to fraud, people are less likely to want to work with them – fewer clients, fewer partnerships, and fewer investors. If fraud went undetected for a long time or could have been easily avoided with proper controls, the reputational challenges worsen.
Listed companies are especially vulnerable here. Word of fraud can cause share prices to drop dramatically. A report by the Association of Certified Fraud Examiners (ACFE) found that news of alleged fraud was enough to drop company share prices by 17% in two days. Recovering from a share price drop requires incredible effort on the part of the company to regain public trust.
Potential business growth in the future can be hindered by a past plagued by fraud. These issues stay with a company and limit the growth opportunities in finding new clients or investors – or even new employees. Fraud stays on the record and can continue to do damage long after financial recovery and legal considerations. A good reputation is easy to lose, and extremely difficult to rebuild.
Lessons Learned
The takeaway? Fraud prevention is crucial. These issues plague companies of all sizes, and you never know what the true damage will be until it is too late. By focusing on control measures, and putting in the effort from the beginning, you can avoid a host of problems later on.
If you don’t think your company will experience fraud – because of its size or your trust in employees – keep in mind that nearly three in four companies experience some kind of fraud at some point in their existence. Do not rely on being one of the lucky ones – put in the measures now.
Fraud prevention is a wide umbrella, and the right tactics will differ by company, but these are some basic measures you can focus on now to start your fraud prevention strategy:
- Separate employee duties: separate financial duties, like cheque signer and cheque authorizer, or banking employees from accounting. If your company is small and this is not possible, adding an independent review process can ensure no suspicious activity slips through the cracks.
- Be careful with cheques: cheques are one of the easiest assets to manipulate, and without the proper controls, can go unnoticed for extended periods of time. Do not sign any cheques without supporting documentation and never sign blank cheques. Reconcile all payments and ensure the cheques are locked away, only available to those who deal with them.
- Conduct background checks: all employees and potential employees should have background checks conducted. Follow up on the information in CVs – references and academic information are often manipulated.
- Have a strong fraud ethics policy: educating employees on what is expected of them, and the consequences of not following those expectations, is important to establish the company as wary of suspicious activity and ruthless against fraud. The perception of potential detection is a great deterrent to fraudulent activities.
- User access control: all parts of the company, especially related to finances, should be protected and only available to the applicable employees. Company computers should have username and password protection for each employee, with an emphasis that passwords should not be shared. This will prevent anyone not involved from accessing the information. In large companies, access control to the facilities can also be an effective preventative and security measure.
- Cybersecurity: in the digital age, cybersecurity is more important than ever. However, it is often overlooked – leaving companies open to threats from all over the world. Security measures can be costly to implement but may save you in the long run. Cybersecurity protects your information, your money, and your business as a whole.
These controls not only protect your business from fraud and all the accompanying problems mentioned above, but it also adds value to your business and the businesses reputation. A small price to pay for a large benefit.
Facing fraud is one of the worst things that can happen to a company. Financial loss, low morale, legal issues, and a damaged reputation can stay with a company years after the fraud has left your mind. Focusing your attention on this often-ignored area can be crucial in protecting your business, and potentially saving it in the process.