International Fraud Handbook

CHAPTER 3Fraud Risk Assessment ^*

For an organization to effectively prevent and detect fraud, it must first understand where and how it is most vulnerable to being victimized by the various fraud schemes; that is, it must identify and assess the entity’s fraud risks.

WHAT IS FRAUD RISK?

As discussed earlier, the Fraud Triangle indicates that there are three interrelated elements that enable someone to commit fraud: the motive or pressure that drives a person to want to commit the fraud, the opportunity that enables the individual to commit the fraud, and the ability to rationalize the fraudulent behavior. The vulnerability that an organization has to those capable of overcoming all three of these elements is fraud risk. Fraud risk can come from sources both internal and external to the organization and is one of many risks that organizational leaders must manage.

Factors That Influence Fraud Risk

The following are among the many factors that influence an organization’s fraud risks.

The Nature of the Business

The types of risks an organization faces are directly connected to the nature of the business in which it is engaged. For example, the fraud risks faced by hospitals and medical practices are vastly different from those faced by banks and financial institutions, construction companies, educational institutions, or retail organizations.

Economic Conditions

Overall economic conditions can have an effect on fraud risks. In particular, poor economic conditions can increase ...