Fraud Occurs When


Fraud, Conflict of Interest, Breach of Duty, Embezzlement

Rather fail with honor than succeed by fraud.

- Sophocles

It is possible that the scrupulously honest man may not grow rich so fast as the unscrupulous and dishonest one; but the success will be of a truer kind, earned without fraud or injustice.  And even though a man should for a time be unsuccessful, still he must be honest: better lose all and save character.  For character is itself a fortune...

- Samuel Smiles

Three Elements of Fraud

Fraud only occurs when three elements come together - motivation, opportunity, and rationalisation, believes David Petterson, a forensic accountant with the NZ chapter of the Association of Certified Fraud Examiners.  Rationalisation involves fraudsters justifying their actions in their own mind.  "You get this with seemingly successful chief executives, such as Jeff Chapman at the Audit Office, who think they have a right to use company funds for themselves, when a prudent person would see it as fraud."

Mr Petterson said chief executives "steal quite a lot, particularly men over 50."  The second, and growing, group of NZ fraudsters are women aged 22 to 35 who are usually in jobs below their level of intelligence, perhaps due to a lack of formal education or having returned to the workforce after having children.

Up to 60% of company receiverships and liquidations during the last 12 months would have involved an element of fraud, although of that 60%, only 5% to 10% will have fraud as a direct cause of the collapse, Mr Petterson said.  Typically only 20% of all frauds in NZ will be detected.  US studies estimate the level of fraud averaging $9 per employee per day.  "In NZ it's been put at between 2% and 5% of turnover, but that's just the tip of the iceberg," Mr Petterson said.

Building a strong team spirit and public praise for staff helps reduce fraud.  A strong internal audit system can lower opportunity levels.  Businesses which even passively recommend dishonest former employees to another firm can be liable for that organisation's losses if the person re-offends. - [Press]

Source: I took this from a site called The People's Embassy whose address WAS but that address no longer seems to work and I don't know the new address (if indeed there is one).

From the US

Fraud occurs when:

  1. An individual or an organisation intentionally makes an untrue representation about an important fact or event;
  2. The untrue representation is believed by the victim (the person or organisation to whom the representation has been made);
  3. The victim relies upon and acts upon the untrue representation;
  4. The victim suffers loss of money and/or property as a result of relying upon and acting upon the untrue representation.

Fraud can be for the benefit and gain of an individual, or for the benefit and gain of an organisational entity or program.  When an individual commits fraud, the benefits and gains may be direct (receipt of money or property), or indirect (reward of promotions, bonuses, power and influence).  When an organisation (actually an employee acting on behalf of the organisation) commits fraud, the benefits and gains to the organisation are usually direct, in the form of financial gain.

Conflict of Interest

A conflict of interest occurs when a person or organisation acts on behalf of another individual or organisation; and has, or appears to have, a hidden bias or self-interest in the activity undertaken; and the hidden bias or self-interest is actually or potentially adverse to the interests of the individual or organisation being represented; and the hidden bias or self-interest is not made known to the individual or organisation being represented.  When a person's conflict of interest results in economic or financial loss to the individual or organisation on whose behalf the person is acting, then fraud has occurred.  Conflict of interest can exist on its own, or can be an intricate part of other frauds such as bribery and illegal gratuities.

Conflict of interest laws apply to government employees and those doing business with government.  In the non-public sector, conflict of interest may not be a prosecutable offence, although the criminal results of such conflict would be.  Conflict of interest can occur and result in fraud without the presence of bribery and illegal gratuities.>  This happens when an individual or organisation acting on behalf of another individual or organisation has a hidden financial interest in the outcome of an event or transaction.

The typical example is that of a company official or employee, or an immediate relative of an official or employee, who has a hidden financial interest (stock or direct ownership) in a vendor doing business with the company.  If the official or employee is in a position to influence the amount of business the vendor does with the company, then a conflict of interest exists.  If that conflict of interest results in unnecessary orders being filled, or paying higher than fair market prices for the goods or services, then fraud has occurred.  This is because the involved individuals will benefit financially through higher valuation of stock or direct distribution of proceeds from doing business with the company.  The victims here are those who expect company officials and employees to act in the best interests of the company, rather than in self-interest.  The loss is dollars needlessly spent on overpriced or unnecessary goods and services.

Conflict of interest can also exist and result in fraud when an organisation has a hidden interest or benefit from the outcome of an event or transaction.  In a government environment, for example, this more subtle type of conflict of interest could occur if government officials, acting on behalf of the government, either alone or in conspiracy with providers of services, obtain state and federal funds and use those funds for other than intended program purposes.  In this instance, the government agency, in acting as the conduit of state and federal funds, has a hidden self-interest that is actually or potentially adverse to the interests of the state and federal government.  An example of this would be the following situation:

An agency official directs the owner of a company doing business under contract with the agency to provide the agency with equipment and contractor staff that will be used to perform work for the agency that is unrelated to the terms and conditions of the contract, and unrelated to the federal program under which the contract is funded.  This favour and benefit creates a conflict of interest because there is no longer an arms-length relationship between the agency, which acts on behalf of the government, and the contractor.

Mail Fraud and Wire Fraud

Under US federal law, anyone who engages in fraudulent activity and uses telephones, telegraph and/or the US Postal Service to discuss or either send or receive correspondence or documents in furtherance of the fraud, can be prosecuted for felony mail fraud and/or wire fraud.

Examples of Mail and Wire Fraud:

bulletIf any of the perpetrators of the crimes used the postal system to mail reimbursement claims, mail bid announcements, exchange correspondence with co-conspirators or victims, submit/return contract amendments, or in any way used the postal system to carry out the fraud, then they can be prosecuted for mail fraud.
bulletSimilarly, if a modem was used to electronically exchange data or file claims related to the fraud; or if co-conspirators discussed related activities over the telephones, or in any way used telephones or telegraph to carry out the fraud, then they can be prosecuted for wire fraud.

Breach of Fiduciary Duty

A breach of fiduciary duty occurs when a person, who is employed by and owes a duty to an organisation or another individual, does something that is not in the best financial interest of that organisation or individual.  Breach of fiduciary duty is a civil matter, not a criminal offence.  However, as a civil offence, the elements of proof required for conviction are considerably simpler than for criminal fraud, and it is not necessary to prove wrongful intent.

Examples of Breach of Fiduciary Duty:

bulletBribery, illegal gratuities, fraudulent conflict of interest, and making false statements are felony crimes.  They are also breaches of fiduciary duty.  This means that in addition to criminal charges, the persons who have committed wrongful acts can be sued for damages in civil court.
bulletThere are other types of breach of fiduciary duty.  These fall under the umbrella of gross negligence, gross mismanagement, and abuse.  An example would be failure to design adequate systems of internal controls that ensure the accuracy of data and information upon which company funds are disbursed.  The victim is the organisation, and the loss is the funds inappropriately disbursed.


Embezzlement is the fraudulent conversion of personal property by a person in possession of that property where the possession was obtained pursuant to a trust relationship.

Examples of Embezzlement:

bulletTypical examples are the use of a kiting or lapping scheme to steal money.  Kiting can occur when a bank allows withdrawals to be made on checks deposited by a customer but for which the actual funds have not yet been collected from the bank on which the check is drawn.  In reality, the cash could either be in transit or non-existent.  Goods and services are then purchased, or cash is obtained from legitimate sources, by writing checks against non-existent account balances.  The fraud is perpetuated by continuous "kiting" from bank to bank checks that are drawn on non-existent funds.  In a kiting scheme, the victim is usually the bank that has paid out on uncollected deposits, and the loss is the money paid out by the bank.
bulletLapping is the use of funds received from payment of accounts receivable to cover a theft of cash.  The perpetrator initially steals cash tendered in payment of an outstanding receivable.  To cover the initial theft, a payment made by a second customer is charged against the account from which the initial theft was made, thus "lapping" the two accounts.  Payment from a third customer is used to cover the second account, and so on.  The victim in a lapping scheme is usually the company from whom the money was stolen, and the loss is the amount of money stolen.

Source: Some of these concepts have been adapted from material contained in the Certified Fraud Examiner's Manual (published by the Association of Certified Fraud Examiners) and in a presentation on fraud by W Michael Kramer J D, CFE.  The example of false statements and claims that resulted from cross-charging government programs was adapted from the article "Avoiding Corporate Self-Incrimination", the Internal Auditor Magazine, April 1986.  Author Mark R Simmons is a Certified Internal Auditor, a Certified Fraud Examiner, and a member of the Albany Chapter of the Institute of Internal Auditors and the Albany Area Chapter of the Association of Certified Fraud Examiners.  He is not a lawyer, so his advice is not legal.

See also:

bulletInmates Teach MBA Students Ethics - Retirement was off when he was nabbed shifting funds between buildings he owned and those he managed for the Department of Housing and Urban Development.  Greenbaum, 52, says he informed HUD of his moves and had every intention of eventually squaring accounts.  "But if you rob a bank and put all the money back, you still robbed a bank," he says...

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