Organizations lose up to 5% of revenue to fraud every year. Besides financial loss, they also risk legal and reputational damages that could lead to business shut down. A significant reason is that many companies take a reactive approach to fraud. Fraud prevention often takes the backseat until they are forced to address it.
However, the key to preventing fraud and its aftermath is to handle it proactively. It stops impending fraudulent practices and the losses that come with it. This article looks closely at why fraud prevention is beneficial to dealing with its consequences.
Let’s take a look.
Why fraud prevention is better than dealing with its aftermath
There are specific reasons why fraud prevention is better rather than dealing with its aftermath. Let’s examine the top benefits of fraud prevention below:
1. Fraud prevention shields against catastrophic losses
Fraud leads to several losses that hampers organizational growth. It can be financial, reputation, or legal. Some fraudulent activities take tons of money and years to recover from, while some organizations never recover from them.
Taking proactive measures against fraud will help businesses prevent these types of losses. They can identify fraudulent activities before they happen and control them, so an organization never experiences its catastrophic aftermath.
2. It builds a positive brand reputation
Customers, investors, and partners want to do business with organizations they trust. However, a company that is consistently susceptible to fraud may hamper the trust of potential customers or investors.
Adopting preventive measures mitigates fraudulent practices, portraying a company as a business with solid control against fraud. This encourages people to trust the business, thereby promoting collaboration, increasing the consumer base, and growing the business.
3. Fraud prevention attracts and keeps customers
An adequate fraud prevention program generates new customers and retains existing ones. Businesses aren’t the only party that incurs losses during the fraud; consumers do, too. For instance, customers lost about $5.8 billion to fraud in 2021 and 2.8 million people filed fraud complaints, implying customers would do what they can to avoid fraud.
Therefore, establishing a solid fraud prevention program will keep customers at peace. Since they trust your company, they won’t have doubts about sharing their data and transacting with you.
Also, you can build a loyal customer chain rather than lose customers during fraud because fraudulent activities won’t happen in the first place.
New customers will feel safe signing up to your platform, purchasing your product, or investing their money because they are confident they aren’t at risk of losing it. Consequently, you will attract new customers and grow a consistent customer base.
4. It prevents legal sanctions
Consumers and legal authorities can sue businesses when fraud occurs. For example, if a company loses customers’ funds and data to fraud, they can sue the company for refunds and damages.
Also, fraudulent activities can result from non-compliance and negligence of a company to preventive measures, leading to legal complications from appropriate bodies.
Best proactive fraud prevention practices for companies
Adopting preventive practices can prevent fraud and its aftermath. Let’s see some of the most effective proactive anti-fraud strategies below:
- Adopt fraud detection tools
Fraud prevention management solutions are one of the most effective ways to prevent fraudulent practices. They identify emerging fraud and expose suspicious activities quickly. They also track users’ behavior in real-time and calculate risk figures to detect impending fraudulent access and transactions.
Excellent fraud prevention management software is great for banks because they adopt machine learning and real-time behavioral analytics for continuous risk assessment. They track, detect and alert banks of fraud before they occur.
Essentially, fraud prevention software streamlines fraud detection and prevention practices. This helps financial institutions spend less time reviewing transactions, enabling a seamless and faster fraud prevention system.
They also allow an efficient, speedier risk management system by providing transparent fraud scores to identify your fraud prevention system’s efficiency.
Finally, fraud detection tools are a must-have for all financial organizations looking to take seamless, proactive steps to prevent theft. Learn more about banking fraud detection to implement the right tools for an adequate fraud prevention system.
- Implement internal controls
Internal controls are the procedures and guidelines companies employ to comply with laws and regulations, enhance operations and prevent internal and external fraud.
Typically, internal controls consist of preventive and detective controls. Preventive control activities stop fraudulent acts from happening through documentation and authorization practices.
It includes separating duties and ensuring that no single individual can record, manage or keep financial transactions. It also limits access to equipment, cash, and other companies’ resources.
On the other hand, detective controls are backup processes structured to discover occurrences the first line of defense missed. It reconciles, evaluates data sets, and takes corrective measures to prevent fraud.
Conducting internal controls safeguards companies’ assets, promotes records’ accuracy, ensures compliance, and protects businesses against other fraudulent risks.
So, by implementing preventive and detective internal controls, you can handle fraudulent transactions proactively and enhance organizational activities.
- Conduct regular internal audit
Internal audit is one of the most prominent ways to prevent fraudulent activities. It evaluates the company’s internal controls, corporate governance, and accounting practices.
It provides risk management and examines how effective internal control is. By doing this, businesses can identify impending problems, detect fraud, and correct lapses to safeguard their business against fraud.
Internal controls include authorization, written processes, procedures, etc. These activities ensure an organization complies with laws and regulations and has adequate risk management practices to prevent fraud and operational inefficiency.
You can conduct internal audits daily, weekly, monthly, or annually, but it’s essential to perform them regularly to detect fraud before it happens.
Generally, internal audits involve the following processes:
- Analysis techniques: It tests random or specific data to know if the control processes should be improved.
- Assessment procedures: This is where the auditor understands the internal control processes and knows if employees are adopting control measures to prevent theft and other anomalies in the operational systems. If auditors notice employees aren’t following the correct control procedures, they call their attention to it and make necessary adjustments.
- Reporting procedures: This may include interim or formal reports. Interim reports are important information an auditor thinks the company must know immediately. At the same time, the formal or final reports are the overview of the processes adopted in the internal audit. It also describes audit results and suggestions to enhance the organization’s internal controls.
Finally, the essence of an internal audit is to ensure a company’s internal control is on the right track. By doing this, companies can identify lapses that can attract fraudulent activities and fix them before fraudsters get a chance.
- Train employees on fraud prevention procedures
Fight fraudulent practices through effective employee awareness. Educate them about the common fraud behavioral patterns so they can detect them from miles away. Your employees should know what to look out for and how to act when they notice suspicious activities.
Train them to identify internal fraud signs, including paying attention to accounting, accounts payable, and payroll activities. Provide company guidelines and show them how to follow them through. Train them to perform specific internal audits to detect fraud independently.
Other than internal fraud practices, your employees must know the external fraudulent activities to look out for, including identity fraud, check or account fraud, new account fraud, etc.
Training employees to detect fraud makes it easier for the company to prevent theft. Workers are fully invested in companies’ activities and have direct transactions with fraudsters disguised as customers. So, their ability to discover suspicious activities will help the company to prevent fraud effectively.
- Create a profile
A critical aspect of the risk assessment program is creating a profile. To do this:
- Examine the company’s exposure level to fraud and identify areas more susceptible to fraud.
- Tighten security in the regions that are prone to risks.
- Carry the employees along; a collaborative effort will give you an overview of all the areas in the organization needing a solid prevention system.
Developing fraud risk profiles allows you to channel your efforts on aspects requiring special attention against fraud.
- Enhance cybersecurity
A weak cybersecurity system will make your company easily accessible to fraudsters. Hackers take advantage of your cybersecurity system to commit fraudulent activities and get away with them. So, create an adequate cybersecurity system to mitigate cyber attack risks. Do this by restricting data access through encryption, additional passwords and data security tools.
Additionally, introduce security awareness among employees, and conduct assessments. Security evaluation may include analyzing weaknesses, creating and executing plans to strengthen vulnerabilities.
Also, develop adequate mobile device securities to prevent fraudsters from accessing the company’s data through smartphones and tablets. You can also safeguard your data from malware and viruses through an advanced endpoint detection and response.
Fraudulent activities affect a company’s image, lead to legal sanctions, reduce customer retention, and lead to financial loss and additional expenses. For these reasons, businesses must prevent fraud rather than deal with its negative aftermath. This article elaborates on the top benefits of proactive fraud prevention practices.
Lydia Iseh is a writer with years of experience in writing SEO content that provides value to the reader. As someone who believes in the power of SEO to transform businesses, she enjoys being part of the process that helps websites rank high on search engines.