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A Comprehensive Look at Fraud Identification and Prevention by James R. Youngblood

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35
Chapter 3
Organizational Fraud
3.1 Introduction
Organizations, large and small, conduct business operations on a daily basis with
each entity operating in a manner suitable to their company mission statement and
goals. Organizations susceptible to fraud include the following:
Multimillion dollar, national and international, organizations
Large businesses operating across many states
Regional business operations offering a wide variety of services
State or city operations with a more limited scope of operation
Nonprofit operations, including churches and charities
Single- unit mom- and- pop operations
As indicated, any organization conducting business operations where assets are
available can become a victim of or a target for fraud. e focus of the fraud can
range from extracting money, inventory, or intellectual assets through avenues cre-
ated in the day- to- day business activities from operations, control procedures, and
employee hiring.
When addressing the issue of fraud in the workplace, large corporations employ
professional security and loss prevention departments. ese departments work
within the corporation to ensure there are strict hiring standards, accounting prac-
tices, inventory control, access control, and all other related operations so the assets of
the company are secure. is is not to say the large corporations are not immune from
fraud, but they place their operation in a better position to deter and prevent fraud.
From a position of the path of least resistance, the path is diverted to make the
midsize, nonprofit, and mom- and- pop operations a more appealing target. In many
36A Comprehensive Look at Fraud Identification and Prevention
midsize- to- smaller operations, they operate with smaller budgets, and many times
employees wear multiple hats. is practice can lead to overlooking certain security
and loss prevention procedures, with a lower level of resistance presented. With the
smaller mom- and- pop operations, budgets are even tighter, and the idea of “it wont
happen to me” is commonplace.
e importance of operating any size business or corporation is not in the
amount of time and money spent working to prevent and deter fraud; it resides in
the knowledge available on where the business is vulnerable to fraud, both internal
and external fraud.
e knowledge required to place the business off the path of least resistance
resides in the education level of the owners or employees given the task of pro-
tecting the company assets. e education level is not based on years of college
experience or degrees held, but how well the business owners and loss prevention
employees are educated on fraud identification and prevention.
3.2 Analyzing Fraud Potential
Chapter 2 on employee theft and fraud discussed the theory of 20-60-20 as it
pertains to categories of individuals in society. Twenty percent of the population
is inherently honest and will not be swayed into dishonesty, no matter the tempta-
tion level. Another 20% of the population is inherently dishonest, and it is hoped
these individuals are weeded out during the applicant screening process as part
of a detailed preemployment background verification. e remaining 60% of the
population does not enter the workforce to commit fraud or steal. e opportunity
level created by company operating procedures could cause an otherwise- honest
individual to commit fraud or steal (temptation).
A proper understanding of organizational fraud potential resides in the cat-
egory of opportunity.
1
To develop a complete understanding of opportunity, com-
pany policies and procedures have to be addressed to cover the two- sided aspect of
fraud potential:
1. Do the daily company operating procedures and actual day- to- day business
activities create an opportunity for fraud/ theft?
2. Do the daily company operating procedures and actual day- to- day activities
allow gaps where an employee can create the opportunity for fraud/ theft?
When looking to conduct a fraud/ theft prevention analysis of a business opera-
tion, it is necessary to identify areas of opportunity:
Organizationally generated opportunities identified through weaknesses in
daily operations
Employee- generated opportunities identified through weaknesses in daily
operations

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