How to Perform a Strategic Fraud Risk Assessment in 5 Steps

In their 2022 global study, the Association of Certified Fraud Examiners (ACFE) estimated that organizations lose 5% of revenue to occupational fraud every year. It’s a significant number, but if you look at their other studies, you’ll notice that it’s been 5% for over ten years. The number hasn’t grown or shrunk.

That’s because fraud is changing. The risk of occupational fraud may stay the same, but external fraud is on the rise. In PwC’s 2022 Global Economic Crime and Fraud Survey, over 70% of the surveyed organizations experiencing fraud said that their most disruptive fraud incident came from either an external attack or from collusion between external and internal sources.

So fraud is a threat that can come from both the inside and outside of your organization. You need effective fraud controls to combat internal and external fraud. But first, you need to do a strategic fraud risk assessment.

Table of Contents

• What is a fraud risk assessment?
• How to Conduct a Strategic Fraud Risk Assessment
  • Step 1: Identify Your Company’s Top Risks
  • Step 2: Categorize the Risks
  • Step 3: Develop a Strategy
  • Step 4: Monitor and Review Risks
  • Step 5: Report Risks
• The Benefits of Assessing Fraud Risk
• When should a business complete a fraud risk assessment?
• Start Assessing Fraud Risk with DataDome
• Fraud Risk Assessment FAQs

What is a fraud risk assessment?

A fraud risk assessment is a tool to identify, understand, and minimize areas of internal and external fraud risk. Internal fraud risks include corruption, cash receipt skimming, and inflated inventory counts. External fraud risks include payment fraud, account takeover fraud, and refund fraud. Companies of all sizes and all industries can do a fraud risk assessment.

Where is your company vulnerable to fraud?

The perimeter of your company is the most vulnerable to external fraud. These are the areas of your company that are available to the public, particularly your websites, mobile apps, and APIs. Your digital platforms are almost certainly at risk of sophisticated bots that will try to break down your defenses and commit some kind of fraud.

The structure of your company and the industry you work in will determine where internal, occupational fraud is most likely to happen. But these areas of business are the usual suspects:

• Inventory
• Payroll
• Procurement
• Disbursements
• Revenue
• Cash
• Financial reporting

How to Conduct a Strategic Fraud Risk Assessment

To prevent online fraud, you need to understand the risk triangle, which is the term that identifies the three reasons why someone commits fraud:

• Incentive. A fraudster commits fraud when they feel pressured or incentivized to do so, e.g. because of financial hardship or because they feel like they’ve been wronged.

• Rationalization. The fraudster will rationalize why they’re committing fraud, e.g. because they believe everyone is doing it or because they feel they have no other choice.
• Opportunity. The fraudster commits fraud because they have the opportunity to do so. This is the area a company has control over and why a strategic fraud risk assessment is important.

With the fraud triangle in mind, let’s now look at the 5 steps you should follow to conduct a strategic fraud risk assessment for proper fraud risk management.

Step 1: Identify Your Company’s Top Risks

The first step is to identify your company’s top fraud risks. Where is your company most vulnerable to fraud schemes? Don’t discard anything at this stage. The idea is to create a big list first and categorize later. Internal fraud risks can be identified with a variety of tools:

• Employee interviews across diverse areas of the business
• Surveys across a wide range of employees
• Workshop sessions across different areas of the business
• Fraud risks of companies in your industry
• Past fraud patterns

External fraud risk can be identified with an online fraud management solution such as DataDome. DataDome’s free 30-day trial requires no credit card and will give you immediate insights into the automated threats your websites, mobile apps, and APIs are currently facing. Sign up today.

Step 2: Categorize the Risks

Once you have a list of internal and external fraud risks, you need to categorize each item. This can be done with the following questions:

• How likely is this fraud scheme to succeed if someone were to attempt it?
• What are the incentives for committing this type of fraud?
• How easily could someone rationalize or justify this type of fraud?
• How would this type of fraud impact the company if it were to succeed?

These questions tie into the fraud triangle, as well as the preventive controls you may already have in place, so you can effectively evaluate each fraud risk. Rank each item according to their likelihood of occurrence (low, medium, high) and their severity of impact (low, medium, high). 

When categorizing fraud risks according to their severity, don’t underestimate costs that aren’t easily quantified, such as bad publicity, damaged reputation, and lost time. That’s why external fraud can be so devastating. Someone who stole your customers’ data may not have stolen money, but the reputational damage can be severe.

Step 3: Develop a Strategy

Once you’ve identified your biggest fraud risks, you need to develop a strategy for each item. You have four options:

• Avoid the fraud risk entirely by terminating the activity tied to it. This won’t always be possible, but if it is, and if the risk is higher than the benefit you gain from the activity, then this is a viable option.

• Transfer the fraud risk to a third party. Just make sure the fraud risk is transferred entirely and doesn’t leak back into your company. For example, data privacy frameworks such as GDPR are still very strict for data controllers, even if they don’t process data.

• Mitigate the risk by reducing its likelihood and implementing controls. This can be done with fraud risk management software, internal hotlines, employee education, etc.

• Accept the risk if the cost of mitigating it is too high. While this may be a possibility for some forms of internal fraud, it is not recommended for external fraud, because the cost of mitigating is almost always far below the cost of successful fraud.

Step 4: Monitor and Review Risks

Once you’ve implemented good fraud prevention methods, you need to monitor and review your list of risks at least once a quarter. External fraud in particular changes constantly. Hackers are always looking for new ways to breach your defenses. Monitor new prevention methods to ensure they’re working as expected.

DataDome works on auto-pilot, but it also provides you with several dashboards to understand what threats you were under and how they were stopped. If you want to see how it works live, schedule a free demo today.

Step 5: Report Risks

When you do come across a case of fraud, it’s crucial that you notify the right parties as soon as possible. In the case of external fraud and the loss of customer data, data privacy frameworks require you to inform supervisory authorities as well as the affected customers. 

How you report internal fraud will depend on its severity and what your strategy was for that type of fraud. For small-scale incidents, sometimes a warning can suffice. For large-scale incidents, conduct a private investigation to understand who’s involved. Gather evidence before you draw strong conclusions, and make sure you find a way to close the fraud loophole permanently.

The Benefits of Assessing Fraud Risk

The median loss of occupational fraud is $177,000. The median loss of external fraud is harder to quantify, but is often much higher because of reputational damage, fees, and lost productivity. Regular fraud risk assessments are a small investment in comparison to these fraud costs.

When should a business complete a fraud risk assessment?

You should look to conduct a fraud risk assessment frequently, at least once a business quarter. Your company and the environment you operate in are ever-changing. What may not have been a fraud risk one quarter ago may be one now, particularly when you consider the many types of e-commerce fraud.

Start Assessing Fraud Risk with DataDome

DataDome protects your websites, mobile apps, and APIs against all automated forms of external fraud risk. It identifies the risk and blocks it in milliseconds, even if it’s a threat it hadn’t encountered before. Additionally, DataDome’s dashboards help you understand the type of threats that are sent your way. Start your free trial today to see for yourself.

Fraud Risk Assessment FAQs

What are the 5 types of risk assessment?

When it comes to fraud risk assessment, there are 5 steps: Identify the risks, categorize the risks, develop the right strategies, monitor and review the risks, and report the risks. These steps will substantially reduce fraud risk at your company.

What is the best fraud risk management software?

The best fraud risk management software for external fraud are solutions that protect you against both unknown and known automated threats. Such solutions are hands-off, low-maintenance, and easy to install. DataDome is an example of such a solution.