Fraud prevention strategies | 21 most effective ways of preventing fraud

Statistics has over time shown that fraud has no clear winner. All we have is collateral loss – the only winner in fraudulent situation is Waste! Fraud prevention strategies is the best bet that businesses have to ensure that the business always wins.

The mistake that a lot of business leaders make is to think of fraud prevention strategies as avoidable short to medium term expenses. There is an Igbo (a tribe in Nigeria) axiom that says ‘Onye re Nkita gote Enwe, ihe ntukwu ka no be ya’ – meaning ‘a person who sold Dog to buy a Monkey still has animal that squats in his or her house’.

We will leave the analysis of the above axiom for another day, this post is about (21) most effective ways of preventing fraud in the context of fraud prevention strategies.

Top 21 most effective ways of preventing fraud in digital age

1. Well managed confidential hotline: my number one must have fraud fighting toolkits in my arsenal is confidential hotline aka whistle blowing scheme. There is no fraudulent activity going on in an organization that someone somewhere does not have a glimpse of. The problem is that most people that have idea of these fraudulent activities tend to be concerned about their identity. It is hard for a close pal in the office to openly turn his or her friend in, but a lot of people wouldn’t mind to do so when their confidentiality or anonymity is guaranteed. This is a proven and tested fraud prevention scheme that every company or businesses must take very seriously.
2. State of the art vendor management scheme: a lot of fraud that are committed in a company are vendor related activity one way or the other. Have a vendor pre-qualification scheme in place where every vendor that is added to your payment system is pre-qualified. Key areas to look out for during vendor prequalification include but not limited to; (a) connection with current and past employees, (b) geo location, (c) address, (d) status of company, (e) capacity of vendor to deliver on contract, etc.
3. Understandable fraud awareness training: this is an often neglected fraud prevention strategy that a lot of forensic accountants have long realized its efficacy as far as reducing the prevalence of fraudulent accounting is concerned. Same can be applied to fraud in general. You will be surprised how much improvement will be achieved simply by creating fraud awareness amongst all stakeholders.
4. Analysis of customer complaint log: most of the fraud that finally become exposed showed from hindsight that customers had made a complaint that if followed with have long exposed the scheme(s). a useful tip to prevent embezzlement before they become huge is to reasonably eyeball customer complaints – especially when it involves finance and is fairly repetitive.
5. Good modern HR practice: hiring honest people makes a whole lot of difference. Fraud will have no place in the work place if all workforce are honest people. – I wish this is that easy. But, really, any business that is serious about about fighting any form of assess misappropriation should start taking their recruitment process very seriously. How can you hire an individual that you barely know a thing about? I once read about a multinational company employing an individual with fake identity. Needless to say that it all ended in tears. The most amazing part of this is that it is not very difficult to perform basic background checks on prospective employees anymore – all thanks to advancement in business technology.
6. Enforceable mandatory vacations: history is littered with instances where fraud is committed by trusted staff who have worked for years without going on vacation. Not taking vacation is a major red flag that I always look for whenever I am called upon to investigate any case. Have a policy of mandatory vacation and enforce it – small businesses may adopt job rotation strategy if they have limited staff. A staff no matter how careful or smart they are will not be in control of what happens in their absence.
7. Transparent inventory control: inventory is one area where fraudulent activities always occur in. Having a very transparent inventory control is a potent fraud prevention strategy that has been used by many organizations worldwide. No shrinkage should be written off without appropriate authorization – as intuitive as this is, I still see organizations where the store manager is given freedom to make stock adjustment at will.
8. Segregation of duties: this is very straightforward. No one should have multiple related functions. This is the bedrock of all other internal controls.
9. Functional internal audit department: it is a fact that not all exposed fraud related activities are credited to the efforts of the internal audit department. However, not having internal audit department leaves organizations even more exposed to fraudulent schemes. The functions of internal audit department as far as safeguarding a firms assets is concerned is very obvious – the only problem is the information gap that exists in the audit field. The job description of internal auditors has long be written to include expanded responsibilities.
10. Adequate prosecution of perpetrators of fraud: prosecuting fraud perpetrators is one area that is not taken very seriously by organizations and that according to many research is acting as encouragement to potential fraudsters. I can understand the plight of companies – they don’t want negative publicity. However, not prosecuting perpetrators of confirmed cases is not good for the image of the business either as one way or the other the words gets out.
11. Appropriate use of Fraud Risk Assessment: using fraud risk assessment can be likened to performing regular medical or financial checkups. Its simple purpose is to gain insight into the current state of things in the system. The fundamentals of Fraud Risk Assessment cannot be fully discussed in an article of this nature.
12. Build strong but positive ethical environment: another way of preventing fraud in an organization is to build a positive ethical work place where people are not bullied or manipulated into doing things they would not have ordinarily done. Building the right kind of positive ethical environment needs strong support from the top. The tone at the top cannot be doing something else and saying something else.
13. Detailed periodic bank reconciliation: a detailed periodic (weekly or monthly) bank reconciliation should be done by someone independent of the accounting department.
14. Proper use of Code of Conduct: it is not just enough to have a code of conduct that is signed by the employees at some point in their dealings with an organization, people should be constantly reminded of the contents of the code of conduct periodically.
15. Use of fraud response plan: it is best practice to have response plan in place not just for fraudulent incidents but for all business risks. A serious minded business owners cannot for things to go wrong before reactively setting up a business continuity plan.
16. Use of real time bank transaction verification: the use of positive pay is usually incorporated into the overall process of real time or near real time bank transaction verification process. Banks in the quest to minimize banks enterprise risk encourage their customers and are willing to give them any level of support in this regard. Contact your bank to see how they can be of help in this regard.
17. Review of petty cash and credit card expenses: as simple as this strategy of combating fraud is, I have in my career as a fraud fighter seen numerous instances where expense records are not reviewed for years. What this does is that it over time increases the confidence level of those committing larceny and all kinds of fraudulent activities.
18. Correct use of management review: part of the functions of management is to ensure that resources are coordinated in a productive way. Management must not take whatever report that is sent to them without reviewing same. Vendors and other stakeholders will start taking undue advantage of a firm as soon as they realize that a particular management does not review documents that are sent to it. I can’t remember the number of cases I have seen where supposed trusted business advisers deliberately inserted unfavorable clause in documents that are signed by officers of a business.
19. Analytical continuous auditing and Data miming: we now live in a world of big data analytics and organizations will be doing themselves a very big di-service by not tapping to this gold mine to uncover a lot of hidden things that are done in an organization on a daily basis.
20. Consistent and correct use of Budget vs Actual data: budgets will not be worth the value of the paper they are printed on if they are not at least used for control purpose. A universal function of management accountant is to provide information to management and this includes variance analysis. Causes of variances should be further investigated especially when it becomes habitual.
21. Use of suitably adequate insurance policy: bad things still happen to good guys no matter how nice they are to everyone. No internal control system is 100% foolproof, hence, fraudulent activities happens once in a while and organizations need to be certain that their insurance package is adequate in all ramifications. Putting in that extra effort to make sure that optimal insurance package that is not too expensive yet sufficiently covers major events are in place is worth the efforts.

Fraud prevention strategies just like other everyday business strategies are not a one off process that is prepared only once and forgotten. These strategies have to be re-visited from time to time just make sure that what works yesterday still works today.