What is Fraud Prevention?

Fraud prevention cannot be a check-the-box exercise. True fraud prevention must go beyond simple compliance to deploying proactive strategies to reduce fraud risks.

Many organizations lack the right policies and processes because they trust their employees or haven’t had a major issue yet. Too often, such companies are experiencing fraud but failing to uncover it. According to the Association of Certified Fraud Examiners (ACFE), 5% of the typical organization’s annual revenues are lost to fraud. 86% of fraud cases involve asset misappropriation, including employee fraud such as padding travel and expense claims.

What Is Fraud Protection and Fraud Prevention?

Fraud protection and prevention includes the policies and processes you put in place to stop fraud from occurring in the first place. While there is no foolproof solution to stop all fraud, there are measures you can put in place that can help mitigate risk. By focusing on the most common types of fraud, you can help protect your company and reduce exposure.

How Fraud Prevention Works

Effective fraud prevention requires a proactive and comprehensive approach. A holistic strategy includes identifying potential risks, establishing strong internal procedures, using technology to monitor and flag potential fraud, and awareness and training.

By consistently comparing data against established baselines and policies, you can more quickly identify anomalies.

The Benefits of Fraud Protection

Fraud prevention techniques provide significant benefits, including:

• Financial protection: Minimizing financial losses resulting from fraudulent activities.
• Operational efficiency: Streamlining processes and reducing disruptions caused by fraud incidents.
• Regulatory compliance: Ensuring adherence to relevant laws and industry regulations related to fraud prevention.
• Reputational preservation: Maintaining public trust and protecting the organization's brand.
• Competitive advantage: Demonstrating a commitment to ethical business practices and risk management.

A strong fraud protection program also encourages compliance with policies and procedures, acting as a deterrent for internal fraud.

Types of Fraud Prevention

There are different types of fraud prevention strategies. They work best when used in combination with a comprehensive approach to combat fraud.

Internal Fraud Prevention

Enterprise-Wide Risk Assessment (EWRA)

An enterprise-wide risk assessment (EWRA) analyzes potential risk as it relates to your specific business, assessing exposure to fraudulent activities that are common in your business or industry. An EWRA provides a realistic report on areas where you may be vulnerable, creating a roadmap for improvements.

A holistic fraud risk assessment strategy can be applied across the entire company or broken into phases based on business units, departments, or functions that may have different levels of exposure. Getting a complete picture of your risk requires examining both internal and external fraud risks across all of your business processes. With an EWRA, you can uncover areas that need closer examination and identify your high-priority items that require attention. If you’re not sure where to start, about half of all reported fraud occurs in four departments:

• Operations (15%)
• Accounting (12%)
• Executives or upper management (11%)
• Sales (11%) Risk assessments should be conducted periodically, especially for high-risk areas, when new products roll out, or there are major changes in process or control. In addition, random checks of financial transactions such as expense reports based on percentages, dollar amounts, or key expense categories are also good practices. As part of your risk assessment, you may also want to benchmark your organization’s risk against fraud prevention efforts taken by similar organizations.

Policy and Procedure Development

Your internal controls will be an essential element of your fraud prevention strategies. Policies should include:

Segregation of Duties

Separating business processes and tasks among different individuals prevents any one person from having total control over the entire process. For example, requiring buyers to get purchase order approval for items over a set amount and AP teams to verify receipt of goods before approving payment and reconciling in accounting systems.

Authorization Controls

Making transactions subject to appropriate levels of review and approval. This is one area where technology can help. By setting authorization controls based on policies, systems can automatically flag non-compliant spending. You can also automate the approval process at single or multiple layers to provide additional safeguards.

Reconciliation

Monitoring and reconciling the accuracy of transactions, accounts, and inventory can help prevent fraud. This includes activities like physical inventory count, comparing employee timesheets with payroll records, or reconciling payments to identify unauthorized or duplicate transactions.

An example is how strong compliance policies and monitoring can help reduce exposure from some of the most common expense frauds, such as:

• Mischaracterized expenses: 65% of business travelers admitted to mischaracterizing personal expenses as business expenses.
• Fraudulent expense claims: Submitting expense reports with fake documents, such as digitally created invoices or receipts taken from vendors and altered with inflated amounts or blank receipts.
• Inflated claims expenses: Employees purchase items and then return them for a refund while submitting for reimbursement.
• Multiple claims submission: An employee might submit the same claim for reimbursement multiple times throughout the year hoping it won’t be noticed.

Automated Monitoring and Auditing

Continuous monitoring of financial transactions, employee activities, and internal processes helps prevent and detect fraud. Automated tools can identify flags that may indicate fraudulent activity or surface irregularities that require further investigation.

Some examples of automated monitoring and auditing include:

• Data analytics to monitor expense reports, payrolls, and accounts payables for duplicates or noncompliant spend.
• User behavior analytics to detect suspicious patterns such as unauthorized system access or bypassing safeguards.
• Ongoing auditing of high-risk processes such as wire transfers, procurement, payments, and inventory.
• Exception reporting to flag transactions or expenses that exceed certain thresholds or violate rules.

Such monitoring can be applied in real-time across every transaction to help prevent fraud.

Fraud Awareness Training

43% of fraud cases are identified through tips. Half of those come from employees. So, it’s crucial that employees know what constitutes fraud and the warning signs to look for.

Effective fraud awareness should outline the various types of fraud, how to spot suspicious activity, and procedures for reporting potential fraud. The AFCE also recommends spending time on the three legs of the Fraud Triangle:

• Opportunity: Lack of monitoring, controls, or discipline
• Rationalization: Employee justifications for committing fraud
• Pressure: External motivations that drive someone to commit fraud

This can help employees spot warning signs that may deserve closer scrutiny.

External Fraud Prevention

Cybersecurity Solutions

The business environment today is interconnected. As companies do more business online and use third-party cloud resources, robust cybersecurity is required to protect sensitive data and critical assets. Prevention against data breaches leading to unauthorized disclosure or identity theft requires applying the foundational pillars of cybersecurity, including:

• Data governance
• Risk management
• Compliance
• Education and training
• Incident management
• Technical controls

Enterprises also need internal systems for online fraud prevention from such activities as credit card fraud, payment fraud, and identity theft.

Regulatory Compliance

Depending on where you do business and the industry you are in, you may be subject to specific regulations or guidelines that apply to fraud prevention. For example, banks and financial institutions must comply with anti-money laundering (AML) and Know Your Customer (KYC) regulations to prevent fraud.

Other industries have additional rules, including:

• PCI-DSS for credit card transactions
• HIPAA for healthcare
• Sarbanes-Oxley (SOX) for public companies in the U.S.
• GDPR for data privacy in the E.U.

Checking regulatory compliance should be part of your EWRA and reviewed regularly to account for evolving legislation.

Robust Fraud Prevention and Compliance

Fraud and noncompliance hurts more than the bottom line. It can take a toll on the employees responsible for ensuring accurate and compliant spending. By implementing automated and integrated digital tools, you can improve your fraud detection and prevention.

SAP Concur is the world’s leading brand for travel, expense, and invoice management. By integrating real-time data and using AI to analyze transactions, businesses get greater visibility into their spending, improved compliance, and reduced fraud risk. See how SAP Concur helps employees comply with spending policies and makes it easier to prevent, spot, and manage inaccurate or fraudulent expense claims.