Fraud has evolved to be more sophisticated and prevalent than ever before. According to the Federal Trade Commission, consumers lost over $10 billion to fraud in 2023. As consumer technologies continue to advance, fraudsters have evolved to committing highly elevated and organized cybercrime. Companies need to prioritize detecting and preventing internal and external fraud attacks to keep their customers’ information safe and protect their businesses from financial losses. 

Conducting a fraud risk assessment is the first step any company can take to proactively mitigate fraud, regardless of industry. In this article, we’ll cover the key elements of fraud risk assessments, including what they are, how they work, and why they are essential to any fraud protection strategy. 

What Is a Fraud Risk Assessment and How Does It Work?

The goal of a fraud risk assessment is to identify a company’s exposure and vulnerabilities to fraudulent activity. The assessment is always customized to the organization’s industry, functional requirements, and risk tolerance. Leaders of each department should conduct their own risk assessments to determine likelihood of fraud. Risk assessments should be updated regularly to reflect changes in fraud trends and the evolving business environment.  

A fraud risk assessment should address five key areas of opportunity for fraud: 

• Financial Reporting:  Intentional misrepresentation of financial information, such as overstating revenues or understating expenses and losses
  
  
• Misappropriation of Assets:  Impacting company assets through means such as larceny, embezzlement, and fraudulent disbursements
  
  
• Illegal Acts & Corruption:  Violation of laws and regulations, bribery, or the illicit use of intelligence, intellectual property, etc.
  
  
• Non-Financial Reporting: Intentional misrepresentation of performance metrics or operational reporting
  
  
• Regulatory Compliance: How a company complies with regulatory requirements and standards

Assessing Your Fraud Risk

While the process will vary depending on the organization’s size, industry, and who’s conducting the assessment, below are five key steps that any company can take to conduct their own fraud risk assessment. 

1.  Identify Risks 
Identify where fraud can occur across the organization, whether internally or externally, and collect detailed information about weaknesses in operational processes, tools, or employee habits. This will highlight what’s missing in your fraud management strategy so you can adjust accordingly. 

2. Analyze Risks 
Analyze the likelihood of fraud occurring as well as the severity of how that fraudulent activity will impact the organization. Determining the consequences of fraud will give you an idea of what fraud protection strategies should be prioritized to prevent financial or reputational losses. 

3. Respond to Risks 
Take action to mitigate the risk of fraudulent behavior, whether by restructuring operational processes, reevaluating common business practices, or eliminating services that have more risk than they are worth.

4. Monitor Risks 
Monitoring risks is crucial to preventing fraudulent activity, especially as fraudsters continue to evolve their skills and take advantage of digital services. It’s essential to adapt and adjust your fraud prevention plan whenever necessary to ensure detection of fraud at all levels of the business.

5. Report Risks 
Report your findings in your fraud risk assessment so that the company can implement controls wherever they’re lacking. Ensure that whoever conducts the assessment remains objective and can suggest solutions to mitigate fraud risks in a way that’s clear and measurable.

Why You Need a Fraud Risk Assessment

By conducting a risk assessment, your organization can use the knowledge gained from the evaluation to employ controls that prevent fraudulent behavior, both internally and externally. This will help you prevent unnecessary financial losses while protecting your customers from data theft. Investing in fraud risk management will give consumers the confidence to do business with you long-term, leading to happier customers and an improved reputation. 

Be proactive about mitigating fraudulent behavior by partnering with an expert in fraud protection. Download our Fraud Risk Management guide below.