Academic journal article
By Nabhan, Reem Adbul Latif; Hindi, Nitham M.
Academy of Banking Studies Journal , Vol. 8, No. 1-2
Fraud has been the major risk that attacks the structure of firms regardless of the size or the industry. Latest study by PriceWaterhouse Coopers (2007) showed that over 43% of companies surveyed from 40 countries from all over the world had reported losses from economic crimes during the previous two years. The study presented that a total of US$ 4.2 billion loss over the last two years was reported by these companies. It is estimated that undiscovered fraud cost US$ 5.7 billion due to the lack of internal controls of the organization.
Insurance industry seems to suffer the most from fraud. Accordingly, PriceWaterhouseCoopers (2007) indicated that this industry lost a total of US$ 4.5 million on average in (2007) mainly in asset misappropriation, while spending on average US$ 1 million in strengthening internal controls. It is impossible to eliminate the fraud but it can be minimized by understanding the reasons that cause fraud and develop a solution to diminish its occurrence.
Fraud started a long time ago and was related to goods in general, like, trading in goods by trying to avoid customs that must be paid or by hiding the poor quality of the goods. The purpose was to gain more profit. Also, fraud was related at that time to livestock and cattle which involved ways to make livestock bigger, healthier or heavier and selling meat by passing horsemeat instead of beef meat. In the late 1960s in America, fraud was perpetuated by filling tanks with oil except the top which was filled with water.
There are many definitions that explain fraud; all of them are around the same concept but in different applications or contexts. According to Spam laws (accessed on 30 May, 2008), "Fraud involves deception and misrepresentation in order to make money. Deception could involve manufacturing counterfeit credit cards or padding insurance claims, or making false claims to receive mortgage loans you wouldn't have received otherwise." Fraud Advisory Panel (accessed on 30 May 2008) defined fraud as "the removal of cash or assets to which the fraudsters is not entitled--or false accounting- the classification or alternation of accounting records or other documents". Another definition of the fraud by Advfn PLC is "illegal activity of trying to conceal information intentionally for personal gain. Many frauds involving financial transactions are committed by business professionals, who use their knowledge and gained credibility to deceive customers". Association of Certified Fraud Examiners (2004) defined fraud as "the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets".
KPMG (2002) reported several causes of fraud. However, the major cause of fraud was the collusion between employees and third parties (55%) followed by poor internal controls (48%). Other causes of fraud are illustrated in the table 1 below:
Banking fraud could be divided to two main categories; namely External and Internal fraud. Examples of external fraud are credit and debit cards transactions, or theft done using automated teller machine to obtain cash in advance. Internal fraud relates to employees inside organizations who can steal cash or inventory from the company or from other employees, or allowing other staff to steal. Internal fraud also called occupational fraud and abuse. Joseph T. Wells (1997) defined occasional fraud as "the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets." According to this definition, internal fraud includes asset misappropriations, corruption and fraudulent financial statements.
To minimize and detect fraud, the firm has to focus on its corporate governance which is based on a set of ethical principles that guide the company to take actions, including introducing new products. …