Fraud is bad for everyone — for businesses, for consumers, for lawmakers and even for fraudsters, assuming they are caught. Still, fraud happens, and business leaders need to be able to identify it before it causes widespread damage and devastation.
Fortunately, there are plenty of warning signs that fraud is occurring within and to a business. Here are a few issues that could lead to fraud, which business leaders should identify and resolve as soon as possible.
A Lack of Physical Security
Physical security is the first line of defense against theft within an organization. Offices should be kept locked and accessible only by employees with a certain level of credentials, and all valuable equipment should have ID tags as well as security tools that make them difficult to relocate without authorization. Physical security measures are good indications that a business is looking for and active working to counteract fraud, so fraudsters are more likely to attack organizations that lack these safeguards.
How does a manager recognize fraud if they cannot tell the difference between a legitimate and illegitimate expense? Recordkeeping is essential for detecting fraud; the accounting department needs to keep careful watch over all cash disbursements, or it will be all but impossible to identify and prove that some kind of financial abuse has occurred. A business should have solid recordkeeping practices in place from the very beginning of their organization, so leaders can quickly understand and act upon their financial situation.
A business should have a reliable sense of how much cash it should have on hand based on its recent performance. Then, if there is some imbalance between those expectations and any actual receipts, the discrepancy should be investigated immediately for signs of unauthorized cash transactions. A leader might be tempted to wait and see if a pattern develops before intervening, but this is a mistake; the sooner a business can stop fraud, the safer the business will be.
In some companies, it is the habit of the accounts payable department to disburse payments to any invoice, purchase order or expense report it receives. However, this is a good way for a company to become a victim of fraud. Criminals can sneak documents to payroll or accounts payable in any number of ways, and if employees are not scrutinizing those documents, the attack will be successful. Even if duplicate invoices and the like are not intended fraud, they can lose business money, so leaders need to instruct their departments to follow proper procedures before releasing any payment.
Unusual Travel Receipts
Many business leaders mistake the term “fraud” as applying only to instances of significant embezzlement, but the theft of smaller amounts can add up over time. The best example of this is in travel reimbursements. Uninvestigated travel reports and receipts often contain expenses that don’t qualify for compensation. For example, an employee might try to get their auto insurance covered after a driving business trip. Company policies concerning travel reimbursement should be clear and available to all workers, and all travel-related claims should be examined for authenticity and applicability.
For over two decades, a majority of businesses have faced mounting digital threats. Tech news headlines are packed with information about the increasing complexity of cybercriminal attacks — but the truth is that most cyber fraud occurs through email. Organizations need to teach their workforce to tell the difference between genuine and fraudulent email messages, which might involve a required training course in cyber hygiene.
Resistance to Tight Controls
Once business leadership recognizes their vulnerability to fraud, they should impose stricter controls that make it easier to detect fraudulent behavior. This type of change might come with some grumbling from staff, but if certain employees appear especially resistant to security upgrades, leaders might become suspicious of their motivations. For those employees not found guilty of fraud, a change management team can help smooth the transition to improved fraud defense.
Some companies foster close relationships amongst coworkers as an effect of their corporate culture, but business leaders should always investigate relationships that could be the result of a fraud-related conspiracy. Especially at-risk employees are those who have access to company financial accounts, so close tabs should be kept on relationships in departments like finance or purchasing.
A business can fall victim to many different types of fraud, and it is all but impossible to prevent any fraud from occurring over the course of a business’s operation. Still, business leaders should put security measures in place and keep watch for a few indications of fraud, so they can mitigate damage.