What is Fraud Risk Management?

Article written as part of Fraud Month, which takes place in March every year. We want to keep you informed of any measures that may be relevant or necessary for your business.

Fraud risk management involves assessing the risk of the various types of fraud to which your company is vulnerable, both internally and externally. Fraud risk management is therefore of crucial importance to the financial security and reputation of an organization. Proactive management of this risk is more than advisable, and enables companies to develop a structured and defined approach in the event of exposure to fraudulent activities. It involves identifying, assessing and mitigating fraud-related threats, whether internal or external. As a contractor, it also enables you to carry out fraud prevention activities with your staff, and detect people with malicious intent.

To achieve this, companies implement rigorous internal control systems, such as segregation of duties, hierarchical authorizations and continuous monitoring of financial transactions. Modern technologies such as data analysis and artificial intelligence are playing an increasingly important role in the early detection of complex fraud schemes. In addition, raising employee awareness of fraud risks, through training and communication programs, reinforces collective vigilance and helps prevent incidents of fraud. In short, a proactive and integrated approach to fraud risk management enables companies to safeguard their assets, maintain stakeholder confidence and ensure sustainability in a dynamic and complex business environment.

Guide: What is Fraud Risk?

First and foremost, fraud risk refers to the possibility that a person or entity may commit fraudulent acts with the aim of illegally obtaining financial benefits, assets or other resources. Fraud generally involves the deception, manipulation or concealment of information with the aim of causing financial loss to another party. Fraud can take many forms, including document forgery, bribery, identity theft, counterfeiting, embezzlement and online scams. Fraud risks can occur both inside and outside a company, involving both employees and external parties such as suppliers, customers or other third parties. Companies implement prevention, detection and response measures to minimize these risks and protect their assets, reputation and financial viability.

Fraud risk management involves assessing the risk of the various types of fraud to which your company is vulnerable, both internally and externally. Proactive management of this risk is more than advisable, because as mentioned in our introduction, it enables companies to develop a structured and defined approach in the event of exposure to fraudulent activities. As an entrepreneur, this management framework also gives you the opportunity to implement fraud prevention measures among your staff, as well as to detect individuals involved in fraudulent acts.

What’s more, when an incident or case of fraud occurs, it is known to demoralize your staff, as well as leading to a loss of confidence on the part of business partners.

Unfortunately, you can’t reduce this risk to zero, but you can work upstream to reduce it as much as possible, which still leads to continuous improvement in your management framework.

How to assess your fraud risk: step-by-step instructions

1. Identify your company’s risks;
2. Assess the impact of identified risks through discussions with your operational staff and, if necessary, with your legal department to evaluate the legal impact;
3. Identify your risk-mitigating controls;
4. Check that your controls are working effectively; and
5. Assess your residual fraud risk and implement mitigating controls if necessary, or take appropriate action.

Subsequently, a fraud expert could review this document to present a work plan for the surveillance to be carried out. The plan should include everyone’s roles and responsibilities, as well as the steps required to achieve them.

This exercise needs to be carried out periodically (every year, for example), because your company’s control environment is not fixed in time, it evolves.

Why is it imperative to establish a framework or oversight of the fraud risk management system?

Fraud risk management system monitoring is necessary for a number of crucial reasons, some of the most important of which are listed below:

• Early detection of fraud: Regular monitoring enables early identification of suspicious or unusual activity, allowing fraud to be detected at an early stage. This enables rapid action to be taken to minimize losses and prevent fraud from escalating.
• Reducing financial losses: Fraud can have serious financial consequences for a company, leading to significant losses. Proper monitoring can minimize these losses by identifying fraudulent transactions and stopping them, ideally before they cause considerable damage.

• Reputation protection: Fraud can significantly damage a company’s reputation. A company that fails to prevent or effectively manage fraud risks losing the trust of its customers, investors and the general public. Proactive monitoring demonstrates a company’s commitment to protecting its stakeholders, and can mitigate damage to its reputation.

• Regulatory compliance: Many industries are subject to strict anti-fraud regulations. Proper monitoring is necessary to ensure that the company complies with these regulations and avoids potential legal sanctions.

• Continuous system improvement: By constantly monitoring the fraud risk management system, a company can identify gaps and weaknesses in its risk management process. This enables continuous improvements to be made to enhance the effectiveness of fraud prevention and detection.

• Customer protection: Customers trust a company to protect their personal and financial information. Proper fraud monitoring helps maintain this trust by preventing data theft and fraudulent activities that could compromise customer security.

• Preventing internal fraud: Fraud is not only external to the company, it can also be committed by internal employees. Proper monitoring enables us to spot the warning signs of internal fraud and take steps to stop it.

Oversight of the fraud risk management system is therefore essential to protect a company’s finances, reputation and legitimacy, and helps maintain stakeholder confidence and long-term corporate stability.

Do you have a fraud prevention and detection policy in place?

Once the fraud risk assessment exercise has been completed, and controls and mitigation strategies have been put in place, it is highly advisable to establish sound governance of these risks, which can be integrated into a Risk Management Policy that will in practice become the key element. It should be clear and disclose your expectations regarding fraud risk management. It should contain at least the following elements:

• The definition of roles and responsibilities with regard to the risk of fraud for everyone involved;
• A statement to foster a culture where fraud will not be tolerated and employees are free, without reprisal, to disclose irregularities;
• Increasing the knowledge of your employees, managers and executives regarding fraud, its issues and repercussions;
• Formal procedures when an investigative process is required; and
• The frequency of updates to fraud risk assessments and the person responsible for them.

You can also disclose your expectations in terms of prevention and detection within your company, and detail the fraudulent acts that will be sanctioned.

Like the risk assessment, this policy should be reviewed periodically and communicated to employees.

What are the advantages of such a policy?

All your employees, managers and executives need to consider this risk, which is present in all your processes, as well as the reputational risk that may arise in the event of a fraud incident. Such a policy has important advantages:

• Raising everyone’s awareness of the many emerging risks of fraud;
• It acts as a deterrent to malicious individuals;
• Communication of simple, effective methods for reporting and resolving incidents;
• Simple, well-known action plans in the event of suspected fraud;
• Enhancing your internal processes to respond to fraud events; and
• Sound management of your reputational risk.

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