What is fraud prevention?

Fraud prevention encompasses policies, procedures, and controls designed to deter, detect, and respond to fraudulent activity. It includes segregation of duties, approval workflows, physical safeguards, background checks, and monitoring systems. Effective fraud prevention makes theft difficult to commit and hard to conceal, reducing both opportunity and temptation.

The fraud triangle

Fraud requires three elements: pressure, opportunity, and rationalization. Financial stress creates pressure. Weak controls create opportunity. 'I deserve this' or 'I will pay it back' provides a rationalization. You cannot eliminate pressure or rationalization, but you can eliminate opportunity through strong controls. Focus your prevention efforts there.

High-risk areas for service firms

Payroll fraud includes ghost employees and inflated hours. Expense reimbursement fraud involves personal purchases disguised as business expenses. Billing fraud diverts client payments to personal accounts. Vendor fraud involves creating fake vendors to issue bogus payments. Each area needs specific controls: independent payroll review, receipt requirements, payment verification, and vendor validation.