Preventing fraud is not one easy step, but rather multiple components combined to increase efficiency of fighting fraud. Discover how to simplify your fraud prevention strategy by breaking it down into four balanced steps.
Developing a comprehensive strategy to combat fraud poses unique challenges for different types of organizations. While some may have a strong system set up to detect fraud, a fraud risk assessment could reveal areas that need addressed to deter fraud early on. Preventing fraud is not one easy step, but rather multiple components combined to increase efficiency of fighting fraud. At its core, complex fraud-fighting strategies can be broken down into four balanced steps that set a foundation for understanding how fraud prevention and detection can be most effective. These steps create a powerful framework geared towards prioritizing efforts and achieving a complex, strong anti-fraud structure through simplicity. The following distills fraud prevention into four critical components, divided into two approaches: the proactive approach and reaction management.
The first half of fraud prevention is your proactive shield. It is the effort you put in to make committing fraud difficult, unappealing and risky to fraudsters.
Anti-fraud controls are the essential, foundational systems and internal checks designed to make fraud harder to execute. This includes things like separation of duties, custody of assets and recording of transactions.
If your anti-fraud controls are lacking, or there are no systems, checks or safeguards in place at various steps, your fraud prevention efforts will inevitably fail. No matter how good your deterrence process is, if the controls system allows anyone to bypass checks, the effort is moot. Tone at the top of an organization that values strong controls is the indispensable base for all proactive measures.
Deterrence involves the actions taken to actively discourage fraudsters by ensuring the consequences drastically outweigh the potential reward. This is where you address the motivation and rationalization aspects of the Fraud Triangle. Deterrence raises the consequences of fraud to a level that even fraudsters may not be able to rationalize. This process includes anti-fraud policies and trainings, whistleblower programs, and routine and surprise audits.
If you have excellent anti-fraud controls but no deterrence measures set up, fraudsters may still be motivated to try, believing they can find a way around the rules. In order to maintain a strong proactive approach, you need the combined power of both controls and deterrence.
The second half of fraud prevention is your reactive net. This is the necessary fallback if a determined fraudster manages to breach your proactive approach.
Detection covers the technologies and processes specifically designed to find suspicious or illicit activity that has already occurred or is in progress. This is your continuous monitoring systems, data analytics and forensic accounting.
The role of detection is crucial, but it requires a mechanism for action. Just like the proactive part of fraud prevention, even if you have the best detection technology but are not prepared to take action whenever an alarm goes off, recovering fraud losses becomes much more challenging.
Response is the immediate action taken once fraud is found or suspicious activity is detected. A strong response is not just about managing the current incident; it is about creating a vital force that reinforces your deterrence efforts. When employees, or even third parties or vendors, see that fraud is always met with a quick and thorough reaction, your business is better protected. This includes investigations, disciplinary measures, recovery and control remediation.
If one half of your fraud prevention efforts fail, it does not doom the entire program, but your ability to wholistically protect against fraud will suffer dramatically. For example:
Strong Proactive Approach with a Weak Reactive Process:
Your controls make fraud very difficult to commit, but if a breach occurs, you have no comprehensive plan to find or deal with it. You have now minimized the chances of fraud, but you are still vulnerable to massive undetected losses.
Weak Proactive Approach with a Strong Reactive Process:
Your fraud detection and clean-up are ideally set up, but because your controls and deterrence are weak, you are constantly fighting to put out fires. You may incur losses and reputational damage even though you are set up to catch the perpetrators — this is simply happening far too late.
Fraud prevention programs require an investment in making fraud extremely difficult to commit while also having an iron-clad plan for if and when it occurs. The goal is not just to catch fraud, but to build a system where the risk of the attempt is too high for potential fraudsters to rationalize. By thinking of fraud prevention as a balancing act, organizations can build a strategic and effective defense against fraud.
