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Most frauds begin small. Something as simple as an employee forgetting a wallet one day and taking cash out of the register to buy lunch — fully intending to pay it back.

But then the rationalization begins: It was only five dollars or If they would have given me the raise I deserved, I would have used my own money.

Days go by and nothing happens. The employee recognizes the opportunity, and the fraud continues or escalates.

Studies find this scenario fairly typical. Fraud generally requires a combination of three things: a need, an opportunity and a rationalization.

Unfortunately, uncovering such fraud takes effort. Often a great deal of effort. There are entire systems of internal accounting controls designed to prevent it or detect it on a timely basis. And once the fraud is discovered there’s often a significant disruption to the business, including dealing with the fraudster, police, insurance, possible regulatory authorities, and other employees.

By the way, while independent auditors are required to design financial statement audits to detect fraud, it is the responsibility of company management to design and implement the systems and controls that can prevent it.

Because of the effort and expense required to uncover and address fraud, it just makes sense to try to prevent it. It’s difficult to remove the need or rationalization elements, so fraud-prevention efforts generally focus on removing the opportunity, as described in a recent blog post The Best Way to Avoid Fraud is to Remove the Opportunity.

 

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