Fraud is a five-letter word that is often whispered with great trepidation. Even in the face of substantial evidence, we thread cautiously and take great pains before accusing anyone of fraud.
And with good reason. A false allegation of fraud can lead to undesirable and often messy consequences, potential legal battles and a loss in productivity and resources until the truth is identified, which can at times prove difficult to unearth.
But what really is fraud? The Association of Certified Fraud Examiners defines fraud as “any crime for gain that uses deception as its principal modus operandus. More specifically, fraud is defined by Black’s Law Dictionary as: A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment. Consequently, fraud includes any intentional or deliberate act to deprive another of property or money by guile, deception, or other unfair means.”
The fraud triangle has been widely used to identify factors for potential fraud. It is often said that an environment that facilitates the three aspects of this triangle have a higher propensity for fraud to occur.
Whereas rationalisation occurs with the individual, opportunities are more within the control of the entity and pressure is often a combination of the two. Although it would be costly or impractical to eliminate all opportunities for fraud, there are many ways in which entities can reduce these opportunities and pressure placed on employees to commit fraud.
It is unfortunate that the persons in trusted positions are often the perpetrators of fraud, predominantly as they have the opportunity to do so. That person with access to your safe or cash register, the one with the keys to the company vehicles or the person responsible for ordering inventory can engage in fraud.
This is not to say that they have but it is important to identify where the opportunities exist, so that controls can be implemented to prevent or detect fraud. A lack or breakdown of controls can present opportunities for persons to engage in fraud.
Pressure occurs when an individual perceives his circumstances to be unbearable and can include unrealistic business targets or unforeseen financial expenses. Pressure alone does not necessitate fraud; however, when combined with rationalisation on the part of the individual to justify why it is acceptable to commit fraud as well as opportunity, this creates the environment for fraud to exist.
The first step in fraud prevention and detection is to understand the potential opportunities within an entity’s various processes for fraud to occur. Pretending that it cannot happen would be naïve and irresponsible. To the extent that an entity can minimise unrealistic pressures without watering down the targets required for the entity to grow, should also be of focus.
Rationalisation can also be minimised if instances of undesirable behavior are dealt with swiftly and decisively, to deter others from thinking that this behavior is acceptable. An entity that sweeps fraud under the carpet sends a very strong message that this behavior is acceptable and opens itself to repeat instances.
The Association of Certified Fraud Examiners is currently engaged in its international annual Fraud Awareness Week, which takes place between November 17 and 23. The Institute of Internal Auditors Barbados chapter is also hosting an event to bring more awareness to this critical discussion topic.
There is a wealth of resources to assist entities in their fight to prevent or detect instances of fraud and raise awareness. With increased awareness, it is hoped that entities can avoid the frustration and financial hardships experienced at the hands of fraudulent behavior.
*Krystle Howell, CPA, CIA, COSO, ALMI, ACS, aka Mavis, is an Internal Auditor by profession, avid artist and a lover of dance.