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No precise legal definition of fraud exists; many of the offences referred to as fraud are covered by the Theft Acts in England and Wales, and under Common Law in Scotland. The term is used to describe such acts as deception, bribery, forgery, extortion, corruption, theft, conspiracy, embezzlement, misappropriation, false representation, concealment of material facts and collusion. Other offences are created by more sector-specific laws such as those that prohibit corruption or create offences related to companies or financial services, for example.
For practical purposes fraud may be defined as the use of deception with the intention of obtaining an advantage, avoiding an obligation, or causing loss to another party. This most often occurs in the context of a relationship with a customer, client, or colleague on an individual or orgaisational basis.
There are four basic ingredients which are necessary for a fraud to occur:
- People to carry out the fraud
- Assets to acquire
- Intent to commit the fraud
- Opportunity
While some people would never contemplate perpetrating a fraud, others might do so if they think they can get away with it. Fraudsters are usually alert, plausible and calculating. You can deter a fraudster who might want to take advantage of you personally, or your business, by being alert to the possibilities. Alertness and effective controls will increase the chances of being caught and will thus act as a deterrent.
In business some frauds arise because of a system weakness, such as a lack of proper control over placing of purchase orders. Other frauds are the result of failures to follow proper control procedures. It may be carelessness in carrying out a check. It may be that too much trust has been placed in one individual with no effective separation of duties. Frauds which result from collusion may be more difficult to prevent. A computer can be instrumental in the perpetration of the fraud because of the absence of human review of transactions. The lack of human involvement may allow transactions to be processed which would have been queried in a manual system.
An organisation can therefore be exposed to the risk of fraud in a number of different ways. For the purpose of this guide we can divide fraud into three categories:
Internal fraud:
This is fraud perpetrated by individuals inside the organisation and is most often carried out by staff who have access to liquid or moveable assets, such as cash or stocks. It is likely that the risk of fraud and its scale will increase if the member of staff is able to conceal the irregularities by also having access to accounting records. It may be opportunistic, though it may also be planned and committed over a long period.
External fraud:
This is fraud which is perpetrated by individuals outside the organisation and covers activities such as theft, deception and computer hacking. It is very often committed as a result of inadequate safeguards.
Collusion:
This type of fraud involves two or more parties, either both internal, or internal and external, working together. This type of fraud can be difficult to detect as controls may at first appear to be working satisfactorily.
The pages that follow illustrate real cases and identify topical scams. Advice, based on this experience suggests ways of preventing fraud happening to you.
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