Protect Your Organization With a Fraud Risk Assessment

Fraud is the deliberate use of deception to gain an unauthorized benefit – whether it takes the form of money, property, services, or another advantage – and it’s a huge issue. Organizations lose, on average, 5% of their yearly revenue to fraud, and that number can be much higher if you aren’t proactive. That’s where a fraud risk assessment comes into play. These assessments are designed to identify the areas of greatest risk so organizations can implement internal controls, allowing them to stop fraudsters in their tracks. 

People commit fraud for one of two reasons: greed or need. However, not everyone in need and everyone with greed commits fraud; the circumstances contribute as well. In order for someone to commit fraud, they have to have the right opportunity (for instance, they know nobody has been reviewing their corporate card statements recently), they need to be able to rationalize the crime (perhaps the organization has mistreated them in some way), and they have to be under some sort of pressure (financial stress, unrealistic deadlines, etc.). If all of these conditions are met, the risk of fraud is heightened exponentially. So, mitigating fraud involves removing one or more of these components. 

The Importance Of Performing A Periodic Fraud Risk Assessment

Considering a global study by the Association of Certified Fraud Examiners (ACFE) found that 90% of fraud was asset misappropriation, and 85% of the time the misappropriated asset was cash, if fraud is present, your finances could take a serious hit. However, monetary losses aren’t the only potential downfall an organization experiencing fraud could face. Fraud can lead to reputational damages, lawsuits, and even criminal charges. Just one big scheme can bring an organization to its knees. Luckily, conducting a fraud risk assessment and implementing internal controls can help lessen the chances of fraud significantly. In fact, the same study found that when companies implemented monitoring systems to raise red flags, they had 52% fewer losses and 58% faster fraud detection than those who did not. 

The Process

Identifying Risks

The first step in conducting a fraud risk assessment is to identify any potential risks. To do this, you’ll need to analyze how your assets are being used, how financial and non-financial reporting is being handled, regulatory compliance areas, and any possible illegal acts. Take a close look at any areas of opportunity, including (but not limited to):

• Revenue
• Cash
• Financial Reporting
• Inventory
• Payroll
• Procurement
• Travel and Expenditures
• Disbursements
• Reimbursements 

Once you’ve determined the areas of risk, take a look at your culture. Do you have any disgruntled employees? Do people find the pay, your hiring practices, and the opportunities for advancement fair? If there’s a big culture issue, people could use that as a rationalization to commit fraud. 

This isn’t to say you shouldn’t trust your employees – as the people operating the organization on a day-to-day basis, they’ll play a vital role in identifying risks. So, utilize them. You could send out anonymous surveys, conduct interviews, or hold an organization-wide meeting where people can share any fraud risks they’ve encountered. 

It’s also important to take a look at the industry you are in. If companies similar to yours have experienced fraud, that could be an area to pay extra attention to.

Assessing Likelihood And Severity

Once you’ve identified where fraud could occur, the next step of a fraud risk assessment is to determine the likelihood that it would be attempted successfully – how possible it is that the fraud would go without detection in a timely manner. When doing this, consider the prevalence of that type of fraud in the industry as a whole, the complexity of the transactions involved, and the number of individuals tasked with reviewing and approving the process. With this information, rank the likelihood from very low to very high. 

The next piece of this is to assess the significance, or how damaging the fraud would be were it to occur. You’ll want to look at the financial condition of the organization, the value of the assets at stake, and any relevant criminal, civil, and regulatory liabilities. Then, rank the significance. 

Evaluating Existing Fraud Controls

The third step in implementing a fraud risk assessment is to evaluate your existing controls – the measures you already have in place to prevent fraud. These could look like:

• Using checks and balances to make sure no individual has full control over all aspects of a process
• Creating written policies and procedures around disbursements, attendance and leave, expense/travel reimbursements, use of assets, purchasing guidelines, etc.
• Having an independent party or someone not involved in accounting processes reconcile bank accounts every month
• Making sure the organization’s assets (cars, credit cards, computers, etc.) aren’t used for personal purposes

After reviewing your existing controls, you might realize you need to further segregate duties, enforce more robust documentation, or even implement an open door policy. Considering 43% of detected thieves were caught by a tip, and half of those tips came from employees, giving employees the opportunity to speak freely with management is essential. 

Implementing Additional Controls When Necessary

New risks could arise and the impact of existing risks could change, so the final step of a fraud risk assessment is ongoing. If you find that the existing controls you have in place aren’t enough to meet the new circumstances anymore, you’ll have to adjust, and conducting regular fraud risk assessments is a great way to ensure you do so in a timely manner. 

Prevent Fraud With ComplianceBridge 

ComplianceBridge offers a wide range of features to make creating, distributing, and utilizing your risk assessments as simple as possible. To start, you can customize the assessments to meet your organization’s exact needs by using multiple question types, creating conditional questions, and even weighing questions for a better quantitative analysis. Once you’ve sent out the assessment, our data visualization tools will intuitively display the results, allowing you to easily gain insights from the responses. And of course, to ensure your fraud detection doesn’t lapse, ComplianceBridge will send out automatic notifications and reminders to reassess as frequently as you need. So, are you ready to take the reins and stop fraudsters in their tracks? Request a demo of ComplianceBridge today!