Fraud

The Cost of Fraud

It is globally accepted that fraud-related crimes are causing great financial harm to victims. Many law enforcement agencies recognize fraud as a high-priority issue. Indeed, the economic consequence of fraud is tremendous. According to the Federal Trade Commission, millions of Americans are injured by fraudulent actions, and the numbers are steadily increasing. The Association of Certified Fraud Examiners estimated that the cost of fraud to companies in the United States is more than $400 billion each year. This includes everything from theft to sophisticated investment scams. Accordingly, some have argued that fraud can affect the financial performance of a typical company, costing between 1% and 6% of annual sales. Numerous well-performing companies have been brought down by fraud. Firms such as Enron, Cendant, Sunbeam, and West Management are dramatic examples. Before Enron's collapse, the U.S. Securities and Exchange Commission was also investigating other companies for possible accounting fraud. Since then, the ability to prevent fraud, or value loss through fraud, has become a potential source of competitive advantage and improved financial performance for firms in today's economy.

Characteristics of Fraud

In general, fraud can be divided into four groups, which also have subgroups. These categories of fraud are individual fraud, corporate fraud, online fraud, and advance-fee fraud. Individual fraud is any fraud that targets a person directly. Hence, this type of fraud is different from frauds that affect businesses and other organizations because the primary victim is an individual. It includes subcategories such as abuse of a position of trust, embezzlement, goods sold as investment, insurance broker scams, and pension liberation scams. This type of fraud happens when someone abuses his or her position of trust or authority for personal or financial gain, sometimes to cause loss to another person.

Another category of fraud is corporate fraud. This type of fraud is usually committed against a business or government. Corporate fraud includes account takeover, bankruptcy-related fraud, fake invoice scams, tax fraud, mobile phone fraud, and payment fraud. This type of fraud occurs when fraudsters create a false identity asking a particular company for money, help, or personal information. By doing so, offenders gain control of any account to make unauthorized transactions.

The third kind of fraud is online fraud. In this type of crime, fraudsters rely on computers and the Internet to fulfill their goals. Online fraud includes offenses such as bank card and check fraud, business opportunity fraud, domain name scams, health scams, identity fraud, and loan scams. Here, [Page 286]criminals using the Internet steal any identity information that belongs to an individual or organization. After they obtain the identity details, they either take money from a particular account or obtain credit cards, loans, and government benefits.

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