What it means
Every business, regardless of size, faces the threat of internal or external fraud. A fraud risk assessment is simply a structured exercise where you step back and look at your operations through the eyes of someone trying to bypass the rules.
You ask questions like: Who has access to the bank accounts? Could someone create a fake supplier and pay themselves?
Are expense claims checked properly? This process matters because preventing fraud is far cheaper than recovering from it.
Beyond financial losses, fraud destroys trust, damages team morale, and can ruin a company reputation overnight. By finding gaps in your controls early, you protect your hard earned revenue and reassure investors, lenders, and staff that the business is managed responsibly.
In practice, this involves bringing together managers from different departments to map out where money moves, where data lives, and who approves transactions. You list potential scenarios, rate them by how likely they are to happen and how much damage they could cause, and then fix the highest risks first.
It is not about accusing people of dishonesty, but rather about building clear, fair systems that protect both the company and its honest employees. Regular reviews ensure your defences keep pace as the business grows.
A small startup has different vulnerabilities compared to an established manufacturer with fifty staff. Tailoring your assessment to your specific operations ensures you focus your time and money where it matters most, rather than guessing blindly.
Conducting a fraud risk assessment is like checking the locks on your house and testing your window latches. You are not assuming every passer-by is a burglar, but you want to make sure casual opportunities for theft are removed so honest people remain honest.
In practice
Real-world examples
Example 1
At Apex Tech, a startup with 12 employees, the founders reviewed who could approve software subscriptions. They discovered that one marketing manager had unmonitored access to a company credit card with no spending cap. The founders now require dual sign-off for any purchase over $500. They also review card statements every month.
Example 2
Oak Tree Bakery, a mid-sized SME with three shops, noticed cash discrepancies at closing time. An assessment revealed that store managers were both counting the cash and entering the daily totals into the accounting software. The owners separated those two duties immediately and began checking deposits against till reports each week.
Example 3
Meridian Logistics, a freight firm with 150 staff, used an assessment to review supplier payments. The team found three dormant vendor accounts that still had active bank details. They removed the outdated profiles and added a quarterly clean-up of the vendor list before anyone could exploit the gap.
Think of it
Conducting a fraud risk assessment is like checking the locks on your house and testing your window latches. You are not assuming every passer-by is a burglar, but you want to make sure casual opportunities for theft are removed so honest people remain honest.
Formula
Calculation
Fraud Risk Level = Likelihood (1-5) x Impact (Financial and Reputational Damage, 1-5). For example, if unauthorised invoice payments have a likelihood score of 2 and an impact score of 5, the total risk score is 10 out of 25, which marks it as a medium-high priority for new approval controls.
A second example shows how the scores rank several risks side by side. Cash taken at the till scores 4 x 2 = 8, payments to a fictitious supplier score 2 x 5 = 10, and a fake employee on the payroll scores 3 x 4 = 12. The ranking is therefore payroll first (12), supplier payments second (10) and till cash third (8), so the first round of new controls goes where the score is highest.Case study
Seen in the real world
This is a fictional, illustrative scenario. GreenField Supplies, a wholesale distributor with thirty staff, experienced a wakeup call when their bookkeeper suddenly bought a luxury car while earning a modest salary. An urgent fraud risk assessment revealed a glaring vulnerability: the bookkeeper had sole control over entering new suppliers, approving invoices, and releasing payments. Management discovered that over eighteen months, the employee had set up a dummy shell company and wired twenty-four fraudulent payments totalling eighty-five thousand pounds. GreenField immediately halted all payments to that account, brought in external auditors, and reported the crime to the police.
To fix the root cause, GreenField redesigned their financial controls. They split the duties so that the person entering supplier details could no longer approve payments. They also introduced mandatory password protections and regular spot checks by an independent manager. This painful experience taught GreenField that blind trust is not a control system, and that clear separation of duties is essential for long term survival.
Watch out
Common mistakes
- Treating the assessment as a one-off task rather than an ongoing yearly review.
- Focusing only on external hackers while ignoring internal risks from trusted staff.
- Creating overly complex rules that frustrate honest employees instead of stopping thieves.
Questions
People also ask
Who should lead the fraud risk assessment?
It is best led by someone independent of daily bookkeeping, such as a director, operations manager, or external accountant, working alongside team leaders.
Does doing an assessment mean we do not trust our staff?
Not at all. Clear controls protect honest employees from false accusations and reduce the temptation that comes from loose oversight.
How often should we update our fraud risk assessment?
At least once a year, or whenever your business expands, adds new payment systems, or changes key finance staff.