What Can You Do to Prevent Fraud?

Fraud doesn’t discriminate. It affects businesses of all types, in all industries, with any ownership structure. While it’s not possible to mitigate every fraud scheme there is, there are plenty of ways to reduce the likelihood your business will experience significant losses from fraud.

Internal Controls

Internal controls are the policies, procedures, and processes your business uses to help ensure the accuracy of your financial reports. They are a system of checks and balances that:

Helps prevent errors in financial records
Helps safeguard assets
Helps you meet external compliance requirements, like labor laws, consumer protection laws, and tax regulations
Helps limit operational disruptions
Aids in informed decision making
Helps protect consumers and business partners

And — internal controls are the most effective thing you can do to prevent and detect fraud.

More than half of all fraud cases occurred due to either lack of internal controls, or from an override of existing controls.

For the most part, all internal controls can be thought of as mechanisms for helping prevent fraud. But there are some fraud-specific controls that are worth focusing on. The Association of Certified Fraud Examiners (ACFE) said in a 2024 report that the following four internal controls were associated with a 50% or greater reduction in fraud loss and fraud duration.

Surprise audits
Financial statement audits
Hotlines
Proactive data analysis

Some internal controls can help prevent fraud from happening in the first place, while others serve as a detection method. To demonstrate the purpose that these controls serve, let’s look at a few examples.

When building your internal control environment, we recommend that you use a combination of both techniques. Prevention controls will help prevent fraud, and detection controls will help you discover the fraud faster, therefore limiting the financial impact of the scheme.

Training

There are many ways to build an effective fraud training program. The ACFE encourages businesses to follow a seven-step process when designing their fraud training program:

A fraud and forensics consultant can help you build an effective program that follows this seven-step process. But don’t wait for a consultation to make changes. Look at your program now and see how you can improve it. Here are a few things that your anti-fraud training program should do:

Explain why fraud prevention is important
Train employees to spot red flags
Inform employees about common fraud schemes
Explain how fraud could negatively impact the organization and employees’ jobs
Describe how internal controls help prevent fraud
Create a clear reporting process for employees to use if they suspect fraud
Promote a culture where employees feel valued and where management shows integrity

Fraud awareness training for all employees is an effective way to reduce fraud risk, but it’s especially impactful when managers and executives receive fraud-specific training. When company leaders are trained to detect fraud, fraud schemes are detected much faster and losses are not as steep.

Fraud awareness training — for employees and management alike — serves many purposes. It:

Educates employees, management, and board members on the types of fraud schemes that exist
Teaches employees about how to respond to suspected fraud
Increases the effectiveness of internal controls
Ensures anti-fraud policies are followed
Gives management an opportunity to communicate their commitment to fraud prevention
Leads to increased compliance with regulatory standards
Can help improve employee morale

Hotlines

Hotlines shouldn’t be overlooked. 43% of all fraud schemes are discovered thanks to a whistleblower, so there needs to be a way for your workers, customers, and vendors to report suspicious behavior.

When building your hotline, it will only be effective if your employees feel safe using it. Your employees need to trust that:

Their reports will be taken seriously.
Their identity will remain anonymous.
They will be safe from retaliation.

A few other hotline best practices are:

Offer multiple reporting mechanisms: If your employees can report a tip via a phone number, website, email address, or text, they’ll be more likely to submit a report.
Train employees regularly: Remind employees that the tip hotline exists and train them in how to use it.
Evaluate the hotline’s effectiveness: Some metrics to consider when reviewing your program are the number of cases reported, the percentage of cases investigated, where complaints originate, average complaint per employee, percentage of anonymous complaints, and reports of retaliation.

Data Analytics

You can harness the power of data technology to help identify fraud or weaknesses in controls. Data analytics is a broad term, but according to the AICPA’s Forensic Accounting- Fraud Investigations FVS Practice Aid, a few data analysis techniques are:

This is what data analytics might look like in practice.

Compare employee data against your list of vendors to see if there are any conflicts of interest.
Take note of outlying entries, especially those in the employee travel, charitable donation, gifts, and entertainment expense accounts.
Look for one-time vendors or vendors with expedited payments.
Drill down into accounts with vague account names, like miscellaneous expense.
Identify duplicate payments.
Review expense reimbursement by person and compare across peers.
Review voids or refunds by employee.

Data analysis helps reduce the cost of fraud schemes by a whopping 50%, but it is one of the least implemented controls. If your business hasn’t yet employed the use of data analytics in internal controls, doing so could be a great way to bolster your anti-fraud efforts.

What next?

Preventing fraud is a multi-step process. Before you can implement the steps above, we encourage you to first learn what occupational fraud is, and then to gain an understanding of what motivates someone to commit fraud . When you’re ready to make changes to your fraud prevention programs and techniques, we can help. Our LaPorte forensics consultants keep up to date on the latest new fraud schemes and can help ensure your business is protected. Reach out for more information.

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