Executive Roadmap to Fraud Prevention and Internal Control: Creating a Culture of Compliance, 2nd Edition

CHAPTER 2

Fraud Theory and Prevention

EXECUTIVE SUMMARY

The Association of Certified Fraud Examiners (ACFE) reports that the average organization loses 5 percent of its annual revenue to fraud. This statistic alone should be reason enough to embrace fraud prevention. Even if this number is off slightly, the cumulative losses to businesses are staggering. Why do people commit fraud? There are many theories. One centers on the elements of motive, opportunity, and rationalization. Can fraud be prevented? Lessening or removing opportunity is one way to fight fraud. This can be accomplished by improved internal controls and accountability. If people know they will be held responsible for acts of fraud, then likely perpetrators will often not commit the crime. Understanding the importance of fraud prevention is critical for a business organization in this new era of improved corporate governance.

FRAUD 101

What is fraud? Before one can completely understand fraud prevention, one must know what fraud is. Webster's dictionary defines fraud as “an instance or act of trickery or deceit especially when involving misrepresentation; an intentional misrepresentation, concealment, or nondisclosure for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right.”1 Black's Law Dictionary defines fraud as “the knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her ...