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Fraud: Red Flag

and Theory of

Definition of Fraud
How does your company define fraud? Defining fraud helps to detect and find it
Blacks Law Dictionary
All means by which one individual can get an advantage over another by false
suggestions or suppression of the truth. It includes all surprise, trick, cunning or
dissembling, and any unfair way by which another is cheated.
Institute of Internal Auditors
Any illegal acts characterized by deceit, concealment, or violation of trust.
These acts are not dependent upon the application of threat of violence or of
physical force. Frauds are perpetrated by parties and organizations to obtain
money, property or services; to avoid payment or loss of services; or to secure
personal or business advantage.

Definition of Fraud

The term fraud has

come to encompass
many forms of

Classification of Fraud

Occupational Fraud and Abuse Classification System


Changes in employee lifestyle, habits and

Decline in employee morale and/or attendance
Operating on a crisis basis
Unexplained variances
One employees does it all and wants to control


Missing, altered, or perfect documents

Invoice items do not appear consistent
Excessive rush or emergency transactions
Vendors with generic names and/or Post Office Boxes
as addresses
Payments made from non-original documentation

Theories of Fraud
1. Social learning theory
Social learning is that individuals learn either pro-social norms or antisocial norms (i.e.
deviant, delinquent and criminal behavior) through key learning mechanisms and processes.
2. Differential association
Differential association is the process whereby one is exposed to normative definitions
favorable or unfavorable to illegal or law-abiding behavior
3. Definitions
Individuals perspectives or attitudes (i.e. definitions) of aberrant activity are shaped by their
proximal relationships with various peer groups. Definitions pertain to ones own attitudes
or meanings that one attaches to given behavior. These definitions can be positive (i.e. prodeviant behavior), negative (i.e. anti-deviant behavior) or neutralizing (i.e. justification(s) for
participating in deviant behavior)

4. Differential reinforcement.
Differential reinforcement implies the balance of anticipated or actual
rewards and punishments that follow or are consequences of behavior
5. Imitation.
Imitation is the engagement in behavior after the observation of similar
behavior of others
6. Self-control theory
Self-control theory predicts that individuals with low levels of self-control
engage in a variety of criminal and analogous acts


7. Routine activity theory

RAT predicts that the probability of crime increases with convergence of three
elements: a motivated offender, suitable target and absence of capable
8. Strain theory.
At the individual level, traditional strain theory suggests that people engage in
crime when they are blocked from legitimately achieving cultural goals