Quick Tips to Avoid Financial Fraud in a Business

Nikita Arya
Nikita Arya Oct 01 2019 - 4 min read
Quick Tips to Avoid Financial Fraud in a Business
Money saved is money earned. Therefore it is very important for the businesses to be vigilant about the risks they are exposed to and keep control of the possible failures and lapses as a carefulness is the guarantee against all frauds.

India Inc. has recently lost a lot of money to the financial frauds in the recent years. The same can be attributed to lack of internal control, diminishing ethical values in the society, non efficient background checks on the employees and poor management. Such frauds occur in the form of vendor fraud, kickbacks, asset misappropriation, bribery, data and information theft, improper or false disclosures to the management and expose the companies to not only the monetary loss but also the loss of goodwill, employee morale, punitive regulatory actions etc. which has even far reaching implications.

Well Defined SOP and segregation of responsibilities

Documentation is food for successful organizations. It is very important for the originations to have detailed and well-defined processes for each of the department and shall ensure that there is a proper segregation of responsibilities in each department and maker checker mechanism can be implemented. For instance the sales department may send the sale orders, the credit risk assessment is done by other department and the material is sent by the production department and the invoicing and receipt of payment is handled by accounts department. In such if the order is received for 10 units and the production unit accidently sends 9 units, then such an error can be detected by the accounts department as the amount sent would differ from the sale order. In such a scenario, where the scope of work for each of the party is defined and the transaction, is spread over different people, then any error in the process is auto detected and can be corrected.

Whistle Blower Mechanism

The companies should develop a whistle blower mechanism whereby the stakeholders including the employees, former employees, customers, suppliers to raise concerns or queries or report cases to the concerned persons in the organization and should ensure that the names of the whistle blowers are not disclosed. The companies can also device a mechanism for rewarding the whistle blowers, so that the concerns can be reported and addressed in time without causing much harm or damage to the organization.

Physical Stock Taking

Taking periodical physical stock audit and asset tagging has also become very important in today’s time, as in a no. of cases of it is seen that the company may have certain assets in its books but yet the same may not actually be there on the ground. For instance beverages companies often supply coolers to the shopkeepers to keep their products but in a no. of cases these coolers are taken by the shopkeepers in their houses or may noteven reach the shopkeepers, though the same may be reflected in the books of the company as assets, therefore it is very important for the companies to get the physical audit of their assets done, to prevent the asset misappropriation.

Risk Mitigation for Cyber Crime

Cyber risk in today’s time can be classified as (a) Loss of Money from the bank accounts or any digital cash- via identity breach or credit/debit card theft (b) Loss of Data: Since data is the new gold, therefore the loss of confidential data of organization in the form of customer data, trade secrets, financial plans, product information etc. Organisationsshould use firewalls, antivirus, network and server monitoringetc. to create barriers for cybercriminals. Employees should be trained against the cyber security risks and proper policies should be in place for reporting data theft.Further emails can contain a variety of threats from attachments containing malware to embedded links, therefore the organisations may make use of the email platform or antivirus programs to protect their business’s communications.

Periodic Reviews

The management should do a periodic review of any deviations from the standard set of process laid down, compare the actual revenues and expenses with the budgeted ones, analyze the related party transactions, periodical financials, major cost centers, major revenue generators, any unnecessary rise or fall in the any of the vectors, compliance with the major laws applicable on the companies. The management shall analyze the impact and reasons for the deviations, if any and shall devise suitable mechanism to address the areas which may be vulnerable to frauds.

Money saved is money earned. Therefore it is very important for the businesses to be vigilant about the risks they are exposed to and keep control of the possible failures and lapses as a carefulness is the guarantee against all frauds.

This article is penned by Sakshi Agarwal, Chief Mentor & Leader: Corporate Secretarial & Legal


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