Understanding your Fraud Risk Environment 

Interpreting a Fraudster 

Identifying the likely fraud schemes that your organization is vulnerable to, both internal and external, is imperative to informing your fraud risk assessment. You must understand the fraud risk, the fraudster’s mindset, the fraudster’s attributes, the fraud crime problem, and the consequences of fraud. When you can place risk, mindset, attributes, the crime problem, and consequences in context with each other, you can develop detective and preventive measures to interpret a fraudster. Maintaining a firm foundation of preventive measures is essential. But where do you begin? Let Greene Forensic Accounting Solutions (“GFAS”) help you in this process. 

Five factors drive a fraudster’s mindset. Those factors or elements are Integrity, Opportunity, Incentive or pressure, Rationalization or attitude, and Capability. The factors or elements build upon each other. An individual’s integrity is the starting point. If a person possesses a great deal of integrity and has a limited opportunity, they will be less likely to cross w “the line of integrity” and commit fraud. 

Opportunity, incentive, and rationalization are the components of the fraud triangle. The combination of the three factors is the driver that leads individuals to commit fraud. The opportunity represents the chance to commit fraud. Incentive or pressure represents motivation and is often caused by financial demands. Rationalization or attitude is the self-justification making the fraudulent act acceptable. The Capabilities aspect depicts the personal traits and skillsets necessary to exploit an opportunity, incentive, and rationalization. Regardless of how individuals feel on the incentive and rationalization and even presented with an opportunity, they would fail to commit fraud unless they possess the right capabilities. 

Once the five fraud elements are in place, the attributes required to manifest themselves successfully, the fraudster must be motivated. Once they exploit the opportunity, plan their illicit activity, and cross “the line of integrity,” their actions will be driven by the level of incentive required, in most instances, a financial incentive. As the opportunity and incentive come into focus, they will rationalize and justify their behavior. They will typically ensure they possess or acquire the necessary skillsets (capabilities) to achieve their illicit objective. All of this leads to the motivation to commit illegal activities and continue forward. 

Knowing How a Fraudster Acts, What Do You Do Now? 

Thwarting a fraudster begins with fraud prevention. The best form of prevention is deterring a potential fraudster from crossing “the line of integrity.” The most effective method is to build a perception of detection by minimizing opportunity and reinforcing that a fraudster will face severe consequences for their illicit activity. You can work to identify and develop fraud scenarios based on known fraud events and investigations, existing risks identified through other risk management efforts, industry and general fraud risk research, and discussions with process owners and key stakeholders. 

Best practices to limit a fraudster’s opportunity include having strong internal controls, consistent monitoring and a fraud risk assessment, assessing and testing the trust environment, including ethics and whistleblower hotlines, and overall vigilance and situational awareness. In a business setting, promote a no tolerance for fraud policy. The policy begins with the tone at the top of the organization.  

The next steps would be to identify specific fraud risks within your organization and implement further preventative measures on the highest risk areas. This exercise may include identifying internal and external fraud schemes prevalent within your industry, identifying potential fraud actors, capabilities and opportunities, and implementing control activities to mitigate possible actions. 

Conclusion 

GFAS has the knowledge, experience, and capabilities to assist you in this process and move your organization forward. We can help you understand your organization’s current state and where you want to be in your fraud risk assessment. Know how a fraudster in your industry acts and what’s driving them. You will be able to prepare and plan against any disruption. Trust is a fraudster’s greatest ally, ensuring the tone at the top and a strong perception of prevention and anti-fraud monitoring will go a long way against a fraudster’s perceived opportunity. Further, if the fraudster knows of the severity of their acts’ potential consequences, it will limit their incentive. Thinking like a fraudster and understanding preventative measures can significantly reduce fraud risks throughout an organization.