What is Fraud and Why Is Fraud Prevention So Important?

As a Certified Forensic Accountant in Connecticut, it comes to me as no surprise that the average organization loses 5% of annual revenue to fraud.  Can you imagine?  If you have a business with employees, there is a good chance that $5,000 of every $100,000 of gross revenue your company earns is being lost to fraudulent activities.  I guess this fact alone explains the importance of fraud prevention.

My favorite definition of fraud comes from the United States Mail Fraud Statute – “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations or promises”.  When it comes down to it, fraud is all about lying, cheating, stealing and lack of integrity.  Even if the 5% number reported by the Association of Certified Fraud Examiners is high, the amount of losses incurred by businesses around the world as the result of fraud is staggering.

The Importance of Fraud Prevention

Fraud prevention is critical to any business organization and definitely affects the bottom line profitability of the business.  In order to prevent fraud, you have to understand that fraud centers on three keys factors:

  • Motive – what reason does the fraudster have for committing the fraud?
  • Opportunity – what conditions or lack of proper internal controls exists that allow the fraudster to commit the fraud?
  • Rationalization – why the fraudster thinks it ok to commit the fraud?

Basics of Fraud Prevention

On its most basic level, fraud prevention entails mitigating the three factors that contribute to fraud.  Motive is eliminated by having a hiring system that reduces the risk of employing someone with a history of risky behavior such as drugs, gambling or criminal activity.  Reducing opportunity is accomplished by having a good system of internal control over the financial activities of the company.  If a potential fraudster knows that there is a good chance they will be caught and punished, then they will rationally not commit the crime.

Ted Lanzaro is the founder of Forensic Accounting and Investigative Services with offices in Cheshire, CT.  Mr. Lanzaro is a Certified Public Accountant, Certified Fraud Examiner and Certified Forensic Accountant in Connecticut specializing in small business fraud investigations, divorce litigation, business valuations, economic damage calculations, litigation support and expert witness services.  For more information, check out his website at www.ct-forensic-accounting.com or call his office at 203-922-1742.