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When running a business, you’ve got to accept the fact that there will be times when external parties or even internal entities will try to pull you down through fraudulent activities.
Driven by motives like pocketing extra money and stealing sensitive data, fraud can inflict severe damage. There can be financial losses, legal issues, reputational harm, and a breakdown of trust and confidence among your stakeholders.
The silver lining here is that fraudsters leave behind digital footprints, which if caught at an early stage can help you take swift corrective actions.
This is where fraud analytics comes into the picture. By turning your company’s data into smart insights, analytics helps you see hidden patterns of suspicious activity and detect inconsistencies before they escalate.
In this blog, you will learn about how fraud analytics can be a powerful ally in your fight against fraud.
Unveiling the hidden costs of business fraud
According to ACFE (Association of Certified Fraud Examiners), companies lose around 5% of revenue to fraud every year.
The most obvious and direct consequence of fraud is financial loss. However, that’s just the tip of the iceberg. At Hobasa, we believe that the repercussions also extend to reputational damage, operational disruptions, compliance issues, customer churn, and most importantly the overall health of a business.
Financial losses
Money flows down the drain – that's one immediate financial impact of fraud. Beyond that, the money also goes into investigating frauds, taking corrective actions, and tackling legalities. The money that could be used for expansion, investments, and other growth initiatives goes into finding the causes of the problem at hand.
Operational disruptions
Fraud in the workplace not only your financial resources but also your teams’ precious time and energy. Starting the process of fraud investigation means diverting your resources that disrupt the ongoing projects. Such disruptions impact the workflow and also the productivity and morale of employees.
Reputational damage
Another unfortunate consequence of business fraud is it puts your company’s hard-earned reputation at stake. This happens especially when there is fraud related to customer data breaches or unethical practices. With negative publicity, your brand’s credibility declines. This has a ripple effect that reduces the trust of not just your customers but even your partners and vendors.
Legal and compliance challenges
Fraud can bring compliance issues to the surface, which can lead to increased regulatory scrutiny. With money going into legal expenses, such challenges can set you back with respect to your company’s finances, internal operations, and reputation.
For accounting fraud, a company may face hefty penalties and legal fees while undergoing lengthy court proceedings.
Customer churn
From being your staunch advocates to switching to competitors, the transition is quick when customers feel their trust has been violated. Customer churn is a major repercussion of fraudulent activities, especially those involving misuse of customer data, financial mishandling, or unethical practices.
Employee attrition
Workplace fraud can hit employees’ trust in your company. This is especially the case when fraud involves management or internal teams. When employees see the company’s culture deteriorating, with no system in place for fraud prevention, they may choose to leave, leading to increased turnover.
Common business fraud to watch out for
The first step to preventing business fraud is to understand what different fraudulent activities look like and the areas they can impact.
Listing down some of the common types of fraud in business:
Payroll fraud
Payroll fraud is quite prevalent and difficult to identify immediately.
Such fraud happens when employees clock in more hours than they have actually worked, to get a higher pay.
Also, instances of buddy punching when an employee clocks in for a colleague who is absent are a form of fraudulent activity. If such situations go unnoticed, they can significantly increase payroll expenses.
Overtime abuse is another issue that arises when employees show overtime hours to reap higher wages.
When it comes to companies themselves, misclassifying employees as independent contractors to avoid paying taxes and benefits, is also a kind of fraudulent activity that can lead to legal troubles.
Financial statement fraud
Such fraud involves altering the financial records to appear financially healthy. This could be in the form of inflating the figures for sales, profits, and assets figures, underreporting operational costs, hiding liabilities, etc.
The objective of such fraud is mostly to show that your company is meeting financial targets that help in attracting investors or securing loans.
Vendor fraud
Vendor fraud can manifest itself in multiple ways. This happens when vendors inflate the bill amount, charging more than what was agreed, or even invoicing for undelivered items.
Such fraud also occurs when fraudsters create fake vendor accounts and issue invoices, causing funds to land in unauthorized accounts.
Tax fraud
Tax fraud occurs when financial information including the earnings and expenses of a company are misreported to evade tax obligations. By underrepresenting income and reporting non-existent expenses, the aim is to reap the benefits of a lower tax slab and hide real income.
Such fraud can attract severe fines from the regulatory authorities.
Cyber fraud
Cyber fraud is the most common and damaging corporate threat that can steal your company’s most precious asset – data!
These include phishing scams where attackers impersonate trusted entities and try to snatch your company’s confidential information. They hack into your system to understand the communication style of your company’s leaders and then use that knowledge to send targeted emails.
Ransomware attacks are another major concern that happens when malicious software attacks an organization’s internal systems, encrypting sensitive data. Once the attackers have access to the data, they demand money for its release.
Such attacks put your customers’ and employees’ data at great risk, losing which results in financial losses and reputational harm.
Harnessing analytics to detect and prevent business fraud
At Hobasa, we believe data is the strongest shield against financial risks. Using the power of data, you can keep a constant check on different functions of your business and spot possibilities of potential fraud. This helps in the early detection of frauds before they turn your world upside down.
Here are some of the fraud prevention tactics that can prove useful:
Detecting anomalies in transactions
Analytics can reveal irregularities in financial transactions that would otherwise go unnoticed.
If a vendor suddenly starts submitting invoices that are of a considerably higher amount than their historical average, your analytics system can generate alerts to keep you notified.
Similarly, using payroll data you can catch inconsistencies such as duplicate payments, unauthorized bonuses, or irregular work hours.
With data-backed charts, it gets easy to identify red flags with respect to both employees and vendors and ensure early intervention.
Decode behavioral patterns
Well-represented data can help you keep a close eye on recurring broader behavioral trends that could turn out to be fraudulent activities. This goes beyond individual transactions and instead focuses on assessing the overall behavior of people and groups connected with your business.
With an established baseline for normal activity, analytics tools can map and analyze the behavior patterns, notifying you in case of deviations. For example, an employee accessing restricted company systems outside of work hours, or a vendor altering banking details frequently.
By flagging such incidents, your team can investigate further to find the reasons behind such behavior and take timely action.
Use risk scores to predict potential fraud
Another way to prevent business fraud is by assigning risk scores to transactions, accounts, or entities based on historical data, industry benchmarks, and red flags.
A high-risk score can be assigned to a vendor who has been consistently delaying payments or incomplete documentation.
With such scores, it’s easy to identify areas that need your team’s immediate attention. These scores are like alarms that help you assess the likelihood of fraudulent activities before they occur, so you can take preemptive actions such as stricter credit terms or enhanced verification procedures.
Support fraud investigations
Using fraud analytics, you can not only spot unusual patterns and behavior, but also the underlying causes. Data helps you drill down into the problem, trace the source of fraudulent activities, and take targeted actions.
When you see an unusual spike in payroll, analytics can quickly show the employees, departments, or systems involved. It can present the increase in salaries of employees, appraisals provided, and other such details to help you connect the dots.
Such comprehensive data also act as evidence in legal proceedings or regulatory audits, helping you meet all compliance and accountability requirements.
Support fraud prevention strategies
Analytics has another compelling role to play – helping you build powerful fraud prevention strategies.
Equipped with the right data, you will be able to make informed decisions about internal process improvements and come up with strong measures to prevent potential fraud before they bring losses to your company.
Using data on historical fraud cases, you can identify issues that are causing a majority of the problems. These could be weak internal controls, high-risk relationships, external threats, or even negative trends blooming in your company.
Armed with this valuable information, you can implement stricter checks and adapt your existing processes to emerging risks.
This will help minimize your vulnerabilities over time and make your business processes more resilient.
Practical application of analytics in fighting business fraud
Analytics is a versatile solution that can be used across industries to tackle different kinds of fraud. Let’s see how.
Banking and financial services
The banking sector experiences frauds involving money laundering, credit card transactions, insider trading, and many others.
By tracking common patterns in credit card transactions like a sudden increase in their frequency and volume at multiple locations, frauds can be easily detected. When it comes to identity thefts, analytics can help reveal unusual behavior like the opening of multiple accounts or any deviations from an individual’s normal behavior.
Another area where analytics helps is invoice fraud by notifying you of transactions that sway from usual account patterns and the ones coming from suspicious IP addresses.
Healthcare
Fraud analytics helps spot and prevent fraudulent billing, incorrect prescriptions, and even instances of identity thefts.
Billing patterns can be examined to find upcoding claims and phantom billing. Analytics also aid in comparing invoices with historical data to check for any suspicious activity.
Retail and ecommerce
Companies operating in this industry are plagued by fraud involving product returns, payments, and discounts.
Using AI-powered fraud analytics, these businesses can identify customer account takeover, through signs like numerous failed login attempts, deviations from normal behavior involving purchase categories, browsing patterns, or sudden changes in account details.
Similarly, for fake returns, analytics can help track accounts with higher return frequency and compare returned items with original purchases.
Insurance
In the insurance industry, frauds such as inflated claims, staged accidents, and fake policies are prevalent.
Using analytics, insurance companies can identify inflated or fabricated claims by comparing claims data with historical patterns, assess policy holders’ risk profiles, and even spot inconsistencies in claims documentation.
Another common fraud concerning insurance companies is fraudulent claims about accidents. In such situations, analytics helps cross-check the incidents with other sources and also assess the track record of the claims made by that individual in the past.
Build a fraud-resilient business using data-driven insights
Fraud is inevitable. As a business, if you are growing, there will always be forces that will try to drag you down, such as the multiple frauds that we discussed above. And these frauds have the power to hurt your hard-earned money and reputation.
With the help of analytics, you can detect fraud before it turns into a disaster. From uncovering hidden patterns to monitoring high-risk activities, data can help you identify signs of fraud at an early stage before they spiral out of control.
With such data in hand, you are better prepared to make smart decisions that can even help you rise above the biggest of challenges.