How to identify and manage fraud risk?

Fraud risk is now a pain point that companies cannot ignore anymore. In 2022, 90% of organizations reported being affected by ransomware, according to the SpyCloud Report. But that’s not the only type of fraud they can be exposed to.

What are they?

An organization faces many risks due to a fraud attempt or even the risk of being too exposed. The consequences can be very difficult to overcome and lead the company to close. Whether the fraud is caused by an internal, external actor or a fraudulent activity, the most important impacts are the following ones:

  • Financial losses: due to payment fraud, fraudulent wire transfer, data breach…

  • Reputational degradation: the organization’s environment has a weakened and less serious image of it. And clients or suppliers can also be victims of a fraud attempt as a result of the first one.

  • Material losses: due to prior financial losses or poor fraud management. Losses can also materialize with a psychological impact on employees.

Types of fraud

A company is exposed to many types of fraud, whether the attack is from the inside or an outsider. The biggest concerns nowadays are cyberattacks.

Here are the most common types of fraud against businesses:

Identity theft is mostly used to scam a business into wiring money on a fraudulent account. The fraudsters contact the person in charge of payments as a fake supplier or impersonate the CEO of the company. In case of fake supplier fraud, they inform the employee of new bank details. In both cases, scammers ask for a payment on fraudulent bank details. Once the funds are received, they usually transfer to many other accounts to be untraceable.

Fraudsters proceed to infiltrate the security and information system of the business targeted to access and steal sensible data. A ransom is asked in exchange for those data. But most of the time they are never returned, and the money is lost. In other cases, the information is leaked, and the company is exposed.

Usually, the employees are targeted with an email or a text message with an attachment or a link leading to a fraudulent page. The page is a copy of a real website aiming to collect identification to a system or a bank personal space for example. This technic is used to prepare a financial fraud and get access to the necessary data.

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Fraud risk assessment & management

Taking into consideration all the risks a business can face, it’s very important to assess fraud risks as well as any other financial risks.

But first, fraud risk assessment is used as a tool to audit the management, assets, and regulatory compliance of an organization to determine the global level of risk. It allows the company to adjust the decisions, investments, and management among other things to improve the organization’s security.

To do so, auditors must conduct the assessment on a regular basis, so the organization is always secured through its evolution. External certified auditors can also conduct the fraud risk assessment

Then the risk must be managed to protect the business from any fraud attempt efficiently.

As stated previously, the organization must conduct an audit on a regular basis with internal and external auditors to identify the weaknesses and strategically act on them. For example, the company can plan for internal auditors to assess the risk on a regular basis and then have external auditors certify the assessment whenever there is a big change.

The risks are identified, and now the organization must create and apply procedures, policies, controls, and software with its employees and all its environment. For example, a team of auditors can be built to conduct the recurrent audit.

Following the audit, all tools and habits decided to prevent fraud attempts must be applied properly by every employee. They must be trained and controlled to ensure the safety of the activity and the efficiency of the protection. Fraud detection is covered, and employees know how to behave if they must face a scam or any fraudulent attempt.

It can be difficult for employees to report a fraud risk because of fear of losing their job, not knowing it’s a fraud, or not knowing how to report it. To ensure that employees report the risks and exercise controls on those potential risks, the organization can use anonymous hotline services, have a corporate culture of transparency, and information about the risks and the importance of reporting them.

Fraud risk assessment and management should be continuously evolve in tandem with the business and its environment to be optimal. Audit and control should be conducted to maintain a thorough understanding of fraud trends, the organization’s vulnerabilities, and prevention strategies, thereby enhancing the “know your business” process.

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