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Fraud involves the use of deception, trickery, and a breach of trust to gain an unfair or unlawful advantage. Occupational fraud entails the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of a company’s resources or assets.
What is Fraud?
At its most basic, fraud is simply defined as cheating. Fraud is the intentional and false representation or concealment of facts for the purpose of gaining an advantage or to avoid a legal requirement, resulting in damage or loss to a company or person. Fraud is closely related to corruption, yet despite an overlap, there are some distinctions. While fraud is the act of intentionally deceiving or misleading someone to gain an illegal or undue advantage, corruption is the abuse of trusted power for private gain. Fraud is considered a criminal offense or a violation of civil law and is therefore subject to prosecution.
What is an Example of Fraud?
There are several noteworthy fraud cases. One of the largest accounting fraud scandals, is energy and service corporation, Enron. In the now infamous case, the company’s CEOs Jeff Skilling and Ken Lay kept large amounts of debt off the company’s balance sheets leading to a shareholders loss of USD 74 billion and thousands of employees and investors losing their retirement accounts and many employees losing their jobs. The fraud was uncovered by an internal whistleblower as well as suspicions related to the company’s high stock prices. Jeff Skilling received a 24-year jail sentence, while Ken Lay died before serving his time.
Why Does Fraud Occur in an Organization?
The occurrence of fraud can be attributed to several reasons. Yet the main reasons that nurture fraudulent behavior in an organization are:
- Weak policies on preventing fraudulent practices in business.
- Inadequate tone at the top which can in turn have a negative influence on behavior within the organization overall.
- Weakness or the absence of internal controls, or, worse, management overriding controls altogether.
- Inadequate ethics and compliance training and communication resulting in a lack of awareness and understanding of fraud risks and consequences.
- Employees ignoring the possibility of fraud, and as a result, they can end up ignoring fraud warning signs.
- Absence of appropriate channels allowing employees to report fraud suspicions.
What are Common Types of Fraud in Business?
Fraud can take various shapes and forms. A few types of fraud in business include procurement fraud, also known as purchasing fraud. Procurement fraud can occur when a company purchases goods or services and an employee involved in the process has a hidden interest. Billing schemes can also involve fraud if these are opaque and inefficiently monitored. Fraudulent billing can include false claims or invoices and fictitious payments, suppliers intentionally overcharging, the substitution of inferior goods and services, or other allegations.
Can You Prevent Fraud?
Public and private establishments should have robust internal controls, efficient reporting channels, and proper follow-up mechanisms to detect and counter fraudulent behavior. Every internal control that a company has in place should ultimately prevent fraud and promote ethical behavior.
Companies depend on their employees to ensure that the highest standards of ethical conduct are maintained and that everyone working on behalf of the company is vigilant in preventing, detecting, and reporting fraudulent behavior. The objective is to address concerns regarding potential misconduct in a fair and appropriate manner and protect the company and its employees. To achieve these objectives, organizations must ensure that employees can speak up when warning signs are detected, while reports should be taken seriously, and thoroughly investigated without jeopardizing the identity of whistleblowers at any time.