A fraud risk factor is an event or condition that tracks the three conditions of the fraud triangle; fraud conditions are reasons why fraud could exist while fraud risk factors are the warning signs. Here is an example: your company is going through hard times and decide to cut benefits and overtime pay to save on costs. This action angers the employees (including a clerk who handles payroll) who work overtime quiet frequently, since they feel they deserve that extra money for going above and beyond; they decide to start stealing their “hard earned money” from the company and the clerk covers up the missing money, so they don’t get caught. The condition is the fact that the employees feel a right to the money, while the risk factor was angry attitude of the employees. Looking at the Madoff case, there was plenty of opportunity for fraud to take place (one of three conditions of fraud). First, Madoff didn’t have to answer to anyone besides his clients (who loved the massive returns he was offering) and had complete oversight over himself; he had complete control over the company with no questions asked (that anyone listened to anyway). Another condition that allowed fraud to take place was his rationalization of committing the crime; he knew it was wrong, but thought he would only have to do this scheme for a little while and would be able to operate legally after making money fast. A few risk factors that were present include his unwillingness to let any Big Four firm audit his company. He also didn’t allow his clients online access to their accounts, but only gave them monthly statements through the mail. Another risk factor was Madoff’s secrecy; he wouldn’t let anyone know how he made so much money “for his clients” and all he said to any questions was, basically, trust me I know what I am doing. All these were red flags that pointed to fraud.
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