FRAUD

A false representation of a matter of fact—whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.

The above legal definition of fraud is very broad and covers a lot of actions. However, in the world of business fraud is often simply taking something that doesn’t belong to you. It can occur once, or as often is the case, many times.

Why do people commit fraud? Although each case will be different, most can be reduced to that famous Willie Sutton quote about robbing banks, because that’s where the money is. A book titled “Other People's Money: A Study in the Social Psychology of Embezzlement” first published in the 1970’s reports on the research of Donald Cressey. Having interviewed many convicted fraudsters, he came to the conclusion that almost all fraud cases begin with living beyond ones means. To the embarrassment of spending more than they earn, add the ability to commit fraud due to their work and rationalizing the action and you have Cressey’s famous Fraud Triangle.


So what can you do to protect your business from becoming the victim of fraud? 1) Have a good system of Internal Controls. 2) Review your processes to make sure that the Internal Controls are not being circumvented. 3) Have a Fraud Policy complete with system for alerting a designated person to investigate fraud complaints. 4) Educate your staff about the cost of fraud to both the company and its employees. 5) Know your staff well and what personal problems they are facing. 6) Stop putting your staff in situations where they might be tempted to commit fraud.

This last one is in my personal list of mistakes owners make when trying to save resources. They expect all of their staff to have the same ethical make up that they have, or worse, they may think that their staff will be more ethical than they are.

There will be more coming from me about ethics in the future.




© Strategic Financial Leadership, Inc. 2010