Commentary: Fraud Prevention 101.

Byline: Tracy L. Coenen

Fraud is an industry unto itself, causing annual losses to United States companies totaling at least $660 billion. While it's easy to focus on the big losses incurred by the likes of Enron, Tyco, and WorldCom, no company is immune to the problem. Companies of all sizes are vulnerable, even though their risks may be different.

The impact of fraud hits a company straight in the bottom line. While large corporations may be able to withstand a six-figure or seven-figure fraud, a smaller corporation or a nonprofit organization may never recover. In order for survival in today's competitive marketplace, businesses must be proactive in the fight against fraud.

Anatomy of a Fraud

Knowing how to prevent fraud requires one to know how and why fraud occurs. Fraud investigators often refer to the "fraud triangle," which illustrates the three necessary components of fraud. Without all three components, fraud will not occur.

The first part of fraud is opportunity. There must be some vulnerability in the system for a fraud to occur. That vulnerability may be something as simple as poor security. Often the opportunity is trust. Management places trust in an employee and therefore gives that person access to assets and systems, and that access creates the opportunity for fraud.

The next component of the fraud triangle is motive. This motive is the reason behind the fraud. It is often some sort of need, whether real or perceived. A real need may be paying for an expensive medication or paying the electric bill. A perceived need is something that the perpetrator wrongly believes she or he needs, such as a luxury vehicle or extra spending money.

Motives may also include a need for revenge against a company or person. Balancing perceived inequities can also be a powerful motive, such as in the case of a person who feels unfairly compensated when compared to peers. Motives include any sort of trigger that may cause an employee to decide that fraud is the answer to the problem.

The final component of the fraud triangle is rationalization. In order to commit fraud, the person has to make it "okay" internally to do the act. For some, this may be easy, as dishonesty may be a way of life. For others, rationalizing theft is a little more difficult. Perpetrators of fraud may tell themselves that they need the money more than the company, that they are simply righting a wrong, or that the company deserves to be defrauded because of lax controls.

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