Fraud is a commonly used term in language and the media.Until the Fraud Act 2006 there was no specific statutory offence of fraud and relevant offences were contained in the Theft Acts.The Fraud Act 2006 brought in specific offences and benefits include: Easier and far more successful prosecution Fraud Act offences do not require any proof that the victim was deceived and focus entirely on the intention and dishonesty of the defendant.The offences relating to fraud are now easily understood and can be used in corporate governance documentation such as codes of conduct.The Theft Acts have been substantially repealed but two main offences remain – theft and false accounting.Theft is a criminal act that may not require deception whereas fraud usually does involve deception.
Life time perspective.People change – not a consistent entity.Pressures change in people’s life environment.Motives: Seek happiness Avoid suffering.The right perspective - most of the population are a risk (including me).The incidence of fraud is under reported (e.g. secondary impact of losing stakeholder confidence in management).Inherent risk Some systems, procedures and situations managers face carry high inherent risk (e.g. cash handling, social security benefit payments).Cost / Benefit- The response to fraud should be proportionate to its likelihood and impact.
Fraud Triangle is a widely accepted model of fraud risk.PhD research by Donald Cressey focusing on convicted embezzlers and how they were overcome by temptation.Fraud may occur when three factors are present in the individual person: Motive / Pressure Perceived Opportunity Attitude / Rationalization.Criticisms of the model: Opportunity must be associated with capability (e.g. know a system) Only motive and opportunity are needed in modern society?The Fraud Triangle provides a framework for thinking about the risk of fraud in any management situation.The aim in countering fraud is simply to break up the triangle so that in any situation the factors needed for fraud do not occur (or at least not together).
Deception is not used to cover up the actual act of fraud.Deception is used to ensure personal status is improved or maintained / not lost.A loss of status could be the respect of family, friends or work colleagues. At a more extreme level loss of status involves actual freedom when a person is sent to jail.
Frauds often start off small and then escalate.That is because people have to overcome the values they hold which tell them that fraud is wrong.May invent an excuse – I’m only borrowing the money, everybody round here is taking money, this employer deserves it because they treat us all so badly, its not fair he is being paid more than me etc.On the first occasion rationalization is hard, but next time and the time after it becomes easier.The important thing is to tell people the behaviour expected of them.Another important thing is to lead by example because people engage in social learning all the time and when faced with an ambiguous situation they look at how others behave to learn how they should behave.
Fraud may occur when three factors are present in the individual person Motive / Pressure Perceived Opportunity Attitude / RationalizationThe Fraud Triangle provides a framework for thinking about the risk of fraud in any management situationThe aim in countering fraud is simply to break up the triangle so that in any situation the factors needed for fraud do not occur (or at least not together)
Countering fraud A guide for managers Warren Park
Learning objectives Understand the nature of fraud Provide a thought process for countering fraud in any situation
Fraud and theft offences Fraud Act 2006 False representation Failing to disclose information Abuse of position Possession / making articles for fraud Participating in fraudulent business Obtaining services dishonestly Theft Act 1968 Theft False accounting
Common terms Gain Loss Money or other property Account or other record Intentional act or omission Not an error Dishonesty Seen as dishonest by an ordinary decent person Defendant knows this
People may commit fraud when … Motive / Pressure Aim to break up the Fraud Triangle Fraud Triangle Perceived Opportunity Attitude / Rationalization
Motives and pressures that may lead to fraud Business reversal Employee / employer relations Personal failure Physical isolation Status gaining Violation of ascribed obligations
Deception A person’s own perception of a financial problem that can’t be shared Fear of losing personal status Fraud offers a secret solution
Reducing motives / pressures Provide easy access to confidential help and support Share the problem Identify alternative courses of action Follow good employment and other practices promoting fairness Help grievances come into the open and deal with them equitably
Reduce opportunity through controls Impersonal Often low cost e.g. password Controls work unless Poorly designed Not operated properly Most common controls Restrict access Segregation of duties Checking and supervision
Promoting the right attitudes Leadership by good example Sets the right culture Tell them Training Code of Conduct Signing publicly to have read and understood People want to believe they are good People must rationalize their bad behaviour Make rationalization of bad behaviour harder
Tackling the risk of fraud in any situation Motive / Pressure Aim to break up the Fraud Triangle Fraud Triangle Perceived Opportunity Attitude / Rationalization