Understanding Fraud: Why It Happens & What to Do About It

Fraud has become one of the most significant risks facing both individuals and organisations today. Whether it’s a cunning phishing email targeting your personal data, or a sophisticated corporate accounting scam, the consequences can be devastating. To truly combat it, we need to understand not just what fraud is, but why it happens — and what steps we can take to prevent it.

At its core, fraud is an intentional act of deception, designed to secure an unlawful advantage or cause loss to another party. It’s not just about stealing money — fraud can also involve misleading people, falsifying records, or abusing trust. For a more detailed explanation of this concept, you can read AIA’s comprehensive guide on What Is Fraud.

The Driving Forces Behind Fraud

One of the best-known frameworks for understanding fraud is the Fraud Triangle, which consists of three interlinked factors:

1. 
   

   Pressure: This could be financial stress, performance targets, or personal greed. When someone feels pressure to deliver or to improve their circumstances, they may rationalise dishonest behaviour.

   
   


2. 
   

   Opportunity: Weak internal controls, lack of oversight, or poor risk management give fraudsters the room to act. Without proper checks, even seemingly small loopholes can be exploited.

   
   


3. 
   

   Rationalisation: Individuals justify their actions to themselves. They may think, “I’ll just borrow it,” or “Everyone does this,” thereby sidestepping their own ethical compass.

   
   

This model isn’t just theoretical — many real-world fraud cases can be traced back to these three forces acting together. By disrupting any one of these elements, organisations can greatly reduce their exposure to fraud.

Common Types of Fraud to Watch Out For

Fraud comes in many forms, and staying alert to them is the first step of protection:

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  Asset Misappropriation: This is when employees steal or misuse company assets — things like cash, inventory, or company property.

  
  


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  Financial Statement Fraud: Here, fraudsters manipulate financial reports to mislead stakeholders — often inflating profits or hiding liabilities.

  
  


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  Corruption: Bribery, kickbacks, and conflicts of interest fall under this category. The scammer uses their influence to extract value illegitimately.

  
  


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  Cyber Fraud: Phishing attacks, identity theft, and online scams are more rampant than ever. These exploits depend on social engineering and digital vulnerabilities.

  
  

Each type of fraud requires different controls and preventative measures, which is why a “one-size-fits-all” strategy rarely works.

How Internal Auditing Helps

Internal auditors play a crucial role in the fight against fraud. While they may not catch every single scheme, they can:

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  Perform risk assessments to identify where fraud is most likely to occur.

  
  


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  Test internal controls to ensure they’re effective against fraudulent behaviour.

  
  


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  Recommend improvements, such as segregation of duties, approval hierarchies, and whistleblower mechanisms.

  
  

In fact, internal audit is often the first line of defense — not just for detecting fraud, but for preventing it in the first place.

Practical Steps for Prevention

Here are some actionable steps individuals and organisations can take:

1. 
   

   Strengthen Controls: Implement checks like dual approvals, surprise audits, and strict reconciliation routines.

   
   


2. 
   

   Educate Stakeholders: Conduct regular training on fraud awareness, especially around digital threats like phishing.

   
   


3. 
   

   Encourage Reporting: Provide anonymous whistleblower channels and ensure that reporting doesn’t lead to retaliation.

   
   


4. 
   

   Use Fraud Risk Frameworks: Adopt a structured fraud risk management framework, similar to those used by professional advisory services.

   
   


5. 
   

   Monitor Continuously: Fraud risk isn’t static. Regular monitoring and data analytics help catch anomalies early.

   
   

Why You Should Care

Fraud doesn’t just cost money — it damages reputation, erodes trust, and can have long-term legal consequences. By recognizing the root causes and investing in preventive measures, organisations can significantly lower their risk. And individuals, too, benefit from greater awareness and a proactive mindset.

In a world where deception can be sophisticated and pervasive, education and vigilance are powerful tools. Whether you're a business leader, an internal auditor, or simply a concerned individual, understanding fraud is the first step toward safeguarding your assets, your integrity, and your future.