The easiest way to lose trust in a system is through fraud. This is why companies and organizations ensure their systems are protected from fraudulent individuals and practices. How easy is this though?
While companies work round the clock to protect their systems, the users are also vulnerable entry-points to fraud. The way a user handles their passwords, the links they click and their general security practices can make or mar their digital identity and accounts.
We’ve written this piece as a guide, drawing from our experiences in preventing numerous fraudulent activities across our systems and possibly help in faster fraud detection and prevention for individuals and merchants/organizations.
Fraudsters are usually pushed to fraud by a feeling of pressure or discomfort coupled with the existence of a favorable scenario and a self-justification of their conducts. The personal profile of most perpetrators is like that of an honest individual and the fraud triangle identified three (3) major factors that lead people/embezzlers to temptation or to commit fraud.
The fraud triangle is a model showing the conditions that increase the likelihood of fraud being committed as a result of external and internal threats in organizations. The fraud triangle is important because it helps merchants/organizations determine the motives behind an individual’s decision to commit fraud as well as the opportunities that enable individuals to perpetuate theft. Using the fraud triangle, it can help a company detect and prevent fraud in parts by implementing more effective internal controls.
The fraud triangle framework comprises three elements that increase the risk of fraud. They include (I) Rationalization, (II) Incentive (III) Opportunity.
This can also be called motivation or pressure factor. An individual can be pressured or motivated to commit fraud because of a personal financial problem, such as a large gambling debt. Sometimes, the pressure can originate from problems at work or personal issues. However, the right motivation can tempt a trustworthy employee to consider cheating their employer.There are different motivations for fraud such as a sense of being wronged, survival and status pressure, a gambling or drug habit, personal debt etc
The person who plans to commit fraud uncovers an internal control weakness and doesn’t believe anyone will notice if fraud is perpetrated. Typically, opportunities for fraud can occur wherever effective oversight is absent and unmonitored, extreme trust in a single individual, lack of supervision etc. It’s also essential to have appropriate disciplinary action for any kind of violation.
The final piece of the fraud triangle is rationalization. When people have motivation and opportunity, most will not choose to act unless they can justify themselves. The common rationalizations that fraud committers use include: “They treated me wrong”, “Upper management is doing it as well”, “There is no other solution”,” I deserved this after the way the company has treated me” etc.
An effective way to prevent these types of rationalizations is to champion transparency when it comes to company finances.
Fraud Mitigation for Merchants
The following are key factors in preventing business fraud:
1. Positive Work Relationship:
A positive work environment can prevent employee fraud and theft. There should be a clear organizational structure, written policies and procedures and fair employment practices where every employee is accountable for their actions, regardless of position. An open-door policy will contribute to a great fraud prevention system as it gives employees open communication with management.
2. Efficient Internal Control System:
Internal control programs are implemented to safeguard your company’s assets, ensure the integrity of its accounting records, and deter and detect fraud and theft. Segregation of duties is an important component of internal control that can reduce the risk of fraud from occurring. For example, a retail store has one cash register employee, one salesperson, and one manager. The cash and check register receipts should be tallied by one employee while another prepares the deposit slip and the third brings the deposit to the bank. This can help reveal any discrepancies in the collections
3. Employee Awareness/Education:
Everyone within the organization should be aware of the fraud risk policy including types of fraud and the consequences associated with them. Awareness affects all employees and educating employees should be a priority.
4. Whistleblower Platform:
It is important that employees work in an environment where they feel they can speak up if they see wrongdoings. A whistleblower platform will help employees report fraudulent activities through a website keeping their identity safe and anonymous or by using a tip hotline.
5. Hire the right people:
Recruiting the right people after rigorous background checks can help prevent hiring bad actors as employees. These trustworthy employees can play important roles in establishing/adhering to anti-fraud policies and procedures.
Protection against fraud can be challenging, but rebuilding trust after a system breach is even more difficult. Prevention, they say, is always better than cure which is why we encourage all businesses to stay alert and always revise their fraud prevention strategies to ensure they’re up to date. The above measures if followed accurately will likely reduce fraud occurrence for businesses.
Written by Temitope Bamidele with contribution from the members of the Flutterwave Fraud Team.