Navigating Cybersecurity & Financial Risks


In The Modern Business Landscape

In the aftermath of the pandemic, organizations are grappling with diverse external risks affecting the global banking system, leading to supply chain disruptions and posing challenges to Treasury’s support capabilities. 

The 2023 Association for Financial Professionals (AFP) Risk Survey Report, titled “Treasury’s Role in Supporting Organizations in an Uncertain Risk Environment,” highlights cybersecurity risk as the most significant risk to navigate, closely followed by macroeconomic risk. Nearly half of the practitioners anticipate that macroeconomic risk will impact earnings most over the next three years. 

Moreover, the survey indicates that practitioners perceive expanded technology usage as contributing to heightened vulnerability to cyber risk within their organizations.

Cybersecurity

In the 2023 AFP Risk Survey Report, approximately 58% of businesses in the U.S. and Canada reported Cybersecurity Risk as the most challenging risk to manage. Cyber and ransomware attacks pose continuous threats to organizations of all sizes, particularly those with annual revenues over $1B. In addition, the 2022 INTERPOL Global Crime Trend Summary Report indicated that cybercrime will continue to escalate in North America over the next three to five years. 3

The enduring difficulty in managing cybersecurity risk is rooted in the ever-evolving nature of technology. While technology adoption presents opportunities for businesses to enhance speed, efficiency and profitability, it also aligns with the sentiment expressed by American Journalist James Surowiecki: “The challenge for capitalism is that the things that breed trust also breed the environment for fraud.”

Technology stands as a primary driver of risk across businesses today, leading to the emergence of new risks as it evolves. Though it also offers an opportunity for risk control, 80% of respondents indicated that their organization is more vulnerable to cyber risk due to the expanded use of technology.

Payment Fraud Update

Payment fraud continues to exhibit cyclical patterns but remains at alarming levels, with 65% of organizations falling victim to payment fraud attacks in 2023.1 Check fraud retains its position as the primary method utilized by fraudsters, although there has been a slight decline in instances due to the ongoing transition to electronic payments.

Furthermore, 79% of organizations expressed their intention to seek guidance from their banking partners in identifying and preventing payment fraud. Additionally, 44% of fraud victims reported an inability to recover funds. In response, organizations are increasingly turning to bank-provided solutions such as Positive Pay, payee validation, and Automated Clearing House (ACH) Fraud Control to mitigate potential fraud losses.

Notably, 92% of surveyed organizations have implemented Positive Pay and indicate it is effective or very effective in combating potential check fraud losses. Additionally, 87% have deployed ACH Fraud Control filters to address fraudulent electronic transactions.

Current Payment Fraud Trends include:

  • Endorsement Fraud
  • Business E-mail Compromise/Impostor Fraud

Fraud Mitigation Strategies

Businesses need to understand that no matter what, they are not immune to fraud. They will never be ahead of the fraud trend and will never be 100% safe from a fraudulent attempt. All they can do is put policies and procedures in place to allow their staff to identify fraud quickly and react to it with lightning speed.

The Association for Financial Professionals suggests a few tips that can help your organization react quickly to a fraudulent attempt and minimize losses: 2

  • Establish a Fraud Policy & Procedures document that outlines:
    • Employee training
    • Dual authentication for electronic payments
    • Separation of duties (where applicable)
    • Specific actions employees should take when fraud is discovered
  • Reconcile accounts as often as possible.
  • Work with your financial institution to employ fraud detection measures.
  • Deploy tamper-resistant check features.
  • Ensure your business insurance provider has included Fraud and Cybersecurity policies to cover potential losses.

While these measures can proactively identify fraudulent attacks, they cannot entirely prevent fraud. In the event of a fraudulent attempt:

  1. Notify your financial institution immediately when fraud is suspected to monitor accounts and implement controls/alerts.
  2. Reconcile all outstanding transactions and audit suspicious transactions to identify the extent of the fraud exposure, including if, what, and how much fraud has occurred.
  3. If you have experienced an actual loss, notify law enforcement and file a complaint.
    a. Note: In certain situations, a legal complaint must be filed within the county where the fraud occurred.
  4. If you haven’t done so already, implement fraud controls at the financial institution to prevent further attempts or losses.
  5. If the financial loss is substantial, notify your insurance carrier to file a fraud loss claim.

These proactive measures and swift responses can help organizations mitigate the impact of fraudulent attempts and safeguard their financial well-being.

Financial Risk

Market conditions over the course of 2022 and 2023 have created an avenue for increased concern in managing liquidity and interest rate risk among organizations. With 57% of organizations reporting liquidity risk concerns, 53% citing interest rate risk as being highly difficult to manage, and 44% indicating concerns over managing inflation risks, it’s easy to see that this year’s market conditions continue to be challenging for finance practitioners.1 Having access to capital in the form of bank loans or through the capital markets has been an important instrument finance teams relied on to help manage liquidity. Smaller and privately held companies may lack access to adequate capital, and therefore, find it challenging to manage both liquidity and interest rate risks. 

Survey respondents identified these three financial risks as having the greatest impact on their earnings over the next three years. While the management of interest rates appear to have had a positive impact on inflation, 64% of North American respondents believe that rising interest rates will have long-lasting effects on rising costs and wages resulting in a higher cost of goods sold, selling and administrative costs. Managing these risks effectively will have a direct impact on the organization’s profits and growth margins. Roughly 52% of respondents believe their organization will be exposed to greater uncertainty in earnings through 2026.

To combat uncertainty in earnings and inflation concerns, 65% of organizations have identified plans to cut costs and expenses over the next 12 months. Finance professionals are actively looking at reducing capital expenditures, negotiating vendor terms that offer early-pay discounts and extend days payable, and leveraging treasury/risk/payments products to identify the most efficient method for payment. In addition, 44% of organizations are taking a more strategic approach to their working capital utilization by implementing new technology and partnering with banks/vendors to identify opportunities for working capital and cash flow improvement.

Financial Risk Mitigation Strategies

In today's complex and ever-changing financial landscape, it's crucial for organizations to proactively identify, understand and mitigate their risk exposure across various aspects of their operations.

Understand Your Risk Exposure

  • Identify what areas of your balance sheet and income statement are the most vulnerable to interest rate, liquidity and inflation risks. Keep in mind that each of these risks may touch more than one area of your organization’s finances.
  • Identify your organization’s working capital needs and thoroughly understand the areas you can proactively impact along with the cause and effect that comes with it. Your finance team, CPA and banking partner can help you work through these opportunities.
  • Run “stress tests” on your financial statements so that you can proactively identify  when, where and what actions you need to take if those events should occur. When planning your tests, focus on gross and net profit margins and your Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and EBITDA margins.

Identify & Plan Your Liquidity Accessibility

  • Identify buckets of operating cash and create layers of cash based on your working capital plans.
  • Capital Expenditures – what is necessary now versus what can wait.
  • Identify sources of additional liquidity your organization can access if needed. These solutions can range from bank/ownership loans to federal/state grants, mezzanine lenders, investors, etc. It is important to understand that in many cases it’s best to line up your liquidity sources before you need them.
  • Pro Tip: Understanding your optimal weighted average cost of capital can provide you with a guide to where to find your most efficient use of liquidity options.

Identify & Plan a Strategy to Mitigate Your Financial Risk

  • When looking at additional liquidity sources, identify both the short-term and long-term borrowing costs. This may dictate a hierarchy of when/how you want to access those options. Organizational borrowing interest rate risk can be mitigated with several strategies/solutions your bank can assist you with.
  • Once you understand the areas of your financial statements these risks can impact, think through how you can mitigate those risks.
    • Example: If your vendors find themselves in a financial pinch, would they offer discounts if you pay invoices early? Would those same vendors be willing to extend your existing payment terms from 30 to 60 days if needed?
    • Are there investments you can make now in the way of people, processes, software or capabilities that can improve cash flow, profitability or productivity?

As organizations navigate the intricate intersection of cybersecurity and financial risks in the modern business environment, it becomes crucial to embrace a proactive and holistic approach to risk management. By fostering a forward-looking mindset, organizations can not only protect their financial integrity but also position themselves to seize emerging opportunities within evolving risk landscapes.

To gain a deeper understanding of the financial risks ahead and explore options to mitigate them, we encourage you to talk with your Treasury Management Representative. Their expertise can provide valuable insights and tailored guidance to address your specific business needs. This proactive approach sets the stage for sustainable growth and long-term success.

Sources:

(1) 2023 AFP Risk Survey. www.afponline.org/publications-data-tools/reports/survey-research-economic-data/Details/risk-2017.

(2) 2023 AFP Payments Fraud and Control Survey. www.afponline.org/publications-data-tools/reports/survey-research-economic-data/Details/payments-fraud.

(3) 2022 INTERPOL Global Crime Trend Summary Report. www.interpol.int/en/How-we-work/Criminal-intelligence-analysis/Our-analysis-reports.