What You Need to Know to Prevent Fraud

Published: Nov 13, 2023
By: Louise Gannuch
Topics: Fraud Awareness
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In the current economic environment, all organizations are increasingly susceptible to fraud from the very people they employ. Fraud is not only an annoyance but poses a significant operational risk. The Association of Certified Fraud Examiners (“ACFE”) estimates that a typical organization loses 5% of its revenue due to fraud.

How can you prevent fraud? The first step is to understand the basics of fraud, why people commit fraud, and the red flags that you should be looking for in your organization.

What is fraud?

Fraud is defined as a deliberate deception to secure unfair or unlawful financial or personal gain or to deprive a victim of a legal right. Of the various kinds of fraud that organizations might be faced with, occupational fraud -- fraud committed by individuals in the course of their assigned roles -- is likely the largest and most prevalent threat for organizations.

Why do people commit fraud?

Cressey’s Fraud Triangle model identifies the following three factors that create favorable conditions for an ordinary person to commit fraud:

Pressure is what motivates an individual to perpetrate fraud. This is often financial pressure such as mounting bills, drug problems, or gambling debt. Pressure could also come from a need to meet certain organizational goals and targets or a simple desire for status symbols such as an expensive house, car, or other assets.

Opportunity is a method by which the individual will defraud the organization. In this stage, an employee sees a way to abuse their position of trust for financial or personal gain. The decision to commit fraud is usually connected with a low perceived risk of getting caught. While organizations cannot always control the pressures their employees experience, they can limit employees’ opportunity to commit fraud through the establishment of effective anti-fraud controls.

Rationalization is the final stage in a fraud triangle where a fraudster goes through the process of justifying the crime in a way that makes it acceptable of justifiable act based on their morals. Fraud acts are often rationalized based on external factors such as a need to pay medical bills or take care of family.

What are the most common red flags?

According to the ACFE, individuals who are engaged in occupational fraud schemes often exhibit one or more of the eight following behavioral traits or warning signs associated with their illegal activities:

Living beyond their means
Financial difficulties
Unusually close association with a vendor or customer
Excessive control issues or unwillingness to share duties
Irritability, suspiciousness, or defensiveness
Bullying or intimidation
Recent divorce or family problems
A general “wheeler-dealer” attitude involving shrewd or unscrupulous behavior

While the presence of one or more of these behaviors does not guarantee that you have a fraudster in your organization, it certainly warrants additional oversight and monitoring activities. Training employees to recognize and report these red flags can be an effective way to prevent and detect fraud in your organization.