Opportunity for fraud – how does it surface?

Having the door wide open is one way to describe the concept of opportunity to commit fraud – there is nothing stopping you from getting your hands on the money and getting it out of the organization.

How does a person realize there is opportunity to do something wrong?  One way is for a person to realize logically that some control or procedure that should be in place is not.  This would happen with someone who has some understanding of internal controls, perhaps from formal training.  More likely the knowledge would come from practical experience at a previous job where some controls were present back then but aren’t working in the new job.

The more dangerous path to knowledge is from experience.  A person makes a mistake and it is never noticed.  At some point the person would intentionally do something small that could be explained away as “a mistake” if detected.  If that is missed by the controls, then a bigger amount is tried. If that is missed, then the barn door is not only wide open, but the walls are gone too.

Examples?  A bookkeeper transposes an expense reimbursement (paying someone $910 instead of $190) and no one ever notices or comments.  Bookkeeper falls behind on the bank reconciliations by six months and nobody comments.  An employee reports some mileage or phone costs twice and it is not corrected.  A manager requests a large payment to a new vendor without any supporting documentation and the vendor gets paid.  Repeat the behavior a few times with transactions that are actually legitimate to make sure the systems is missing the boat all the time and you can cut loose.

In the typical fraud pattern the amounts are very small at first, most likely accidents. Then the amounts grow.  In time, as the amounts are never noticed, the fraudster will get bolder with ever increasing amounts.

Other posts in this series on the fraud triangle are in the fraud category in the right column, or click here.

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