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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 revenues due to fraud (ACFE 2018 Report to the Nations). 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.
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.
Cressey’s Fraud Triangle model identifies the following three factors that create favorable conditions for an ordinary person to commit fraud:
According to the ACFE, individuals who are engaged in occupational fraud schemes often exhibit one or more of the six following behavioral traits or warning signs associated with their illegal activities:
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.