Fraud is not entirely avoidable in business, as no system is infallible, and human behavior can be unpredictable. Hence, there is a need to set up effective management strategies to manage the risk of fraud, making it less likely to occur and more manageable if it occurs. What exactly does managing the risk of fraud entail?

Managing the risk of fraud refers to identifying, preventing, detecting, and responding to fraudulent activities within an organization. The goal of managing fraud is to minimize the risk of fraud, protect assets, and protect the integrity of financial and operational processes.

To effectively manage fraud, three factors must be in place: strong internal controls, an internal audit function, and a whistleblowing system. Continue reading as we explore these three factors and how you can implement them in your organization.

How To Manage The Risk Of Fraud

To effectively manage the risk of fraud, strong internal control, an internal audit function, and a whistleblowing system must be in place. Let’s explore and see what they entail:

1.      Strong Internal Controls

Internal controls refer to the processes, structures, and mechanisms designed to safeguard the company’s assets, ensure the accuracy of the financial and operational system, and protect the company’s reputation. It also refers to setting a system approach to identify, understand, and mitigate risks.

There are several types of internal control measures. To be effective in managing the risk of fraud, a combination of these types of controls needs to be implemented. These include:

• Segregation of Duties: Fraud thrives when no system allows for a clear separation of roles, duties, and responsibilities. Establish a structure that promotes a clear separation of responsibilities and duties among the employees. This helps to ensure that no single individual has absolute control over all aspects of any critical financial transaction. This minimizes the opportunity for fraudulent activities.
• Authorization and Approval Processes: Implement strict procedures for approving transactions. There should be restricted access to the company’s assets and finances. Also, ensures that only authorized personnel can initiate or approve significant financial actions.
• Regular Reconciliation: Establish a process that allows for frequent reconciliation of accounts. This helps to detect discrepancies early, which allows for timely investigation and correction.
• Access Controls: This involves limiting access to inventories, financial systems, and sensitive data. Only those who need it for their job roles should be given access, and a system of supervision should be implemented. This minimizes the risk of unauthorized transactions and fraudulent financial risks.
• Physical safeguards: The internal control system is not limited to only protecting financial and sensitive data. It also involves safeguarding physical assets, like cash and inventory, through secure storage and monitoring systems.

2. Internal Audit Function

Another major strategy to manage the risk of fraud is to strengthen your internal audit function. The internal audit team should be empowered to periodically assess the effectiveness of the internal control system. Assessing the system helps the audit team identify weaknesses that could be exploited for fraudulent purposes. This helps to maintain the integrity of the internal control system. Other functions of the internal audit towards managing fraud include:

• Risk Assessment: The auditors should evaluate the organization’s risk profile, focus on areas with higher fraud risks, and prioritize them.
• Ongoing Monitoring: Your internal audit team should conduct regular audits and surprise checks for early detection of fraudulent activities. Continuous monitoring helps to ensure that controls are functioning as intended.
• Reporting and Recommendations: All financial reporting documents should be assessed by internal audits before being approved. This helps the audit team detect vulnerabilities and suggest corrective actions to strengthen fraud prevention measures.

3.      Whistleblowing System

The whistleblowing system is mostly a detective strategy for managing the risk of fraud in small, medium, and large corporations. To build an effective whistleblowing system that will be effective in managing risk, ensure the reporting mechanism is anonymous and confidential. This encourages employees to report suspicious activities without the fear of retaliation. Also, provide multiple reporting channels (e.g., hotlines, online platforms) to ensure accessibility and convenience for employees. Other things you have to do to ensure your whistleblowing system include:

• Protection Against Retaliation: Protect the whistleblowers from any form of retaliation. You create a culture of transparency and trust by doing this.
• Timely Investigations: Conduct immediate investigations on whistleblower reports to address potential fraud quickly and mitigate damage. This encourages the whistleblower to report more suspicious activities in the organization.
• Regular Communication and Training: Educate your employees about the whistleblowing system and how to use it effectively.

Integration of All Three Elements

Combining strong internal controls, an active internal audit function, and a robust whistleblowing system creates a comprehensive fraud protection framework. Each element supports the others, producing a well-rounded framework. To ensure the sustenance of these systems, regularly review and update them to ensure there are no weak points and their potency in protecting the company from evolving fraud risks is still intact. Note that implementing these strategies helps to detect and prevent fraud and builds a culture of integrity and accountability within the organization.

Final Words

Don’t let your business become a victim of fraud. At Mac Adebowale Professional Services, we specialize in helping organizations like yours implement robust strategies to manage and mitigate the risk of fraud. Contact us today at emails@macadebowale.com or macadebowaleadvisory@gmail.com to learn how we can help protect your business from fraud.