Fraud Prevention and Detection
The Fraud Prevention and Detection domain tests the fraud triangle, common public-sector schemes, red flags, detection analytics, and the response to suspected fraud. Prevention is control design; detection is independent verification; response is evidence preservation and legal process. Questions often ask what to do first when an anomaly appears-and the answer is rarely “confront the employee.”
Core concepts
- Fraud triangle: pressure or incentive, opportunity, and rationalization. Controls attack opportunity; tone at the top and employee assistance address pressure.
- Common schemes include skimming, cash larceny, false vendor invoices, shell companies, kickbacks, payroll ghosts, expense reimbursement fraud, check tampering, credit card misuse, and concealment through journal entries.
- Red flags include lifestyle changes, refusal to take vacation, duplicate vendor addresses or bank accounts, sequential invoice numbers from different vendors, after-hours access, period-end adjusting entries, and citizen complaints.
- Detection uses surprise counts and audits, data matching (vendor master to employee master), duplicate payment tests, trend analysis, hotlines, and mandatory rotation.
- Response: preserve evidence, restrict access, involve counsel and law enforcement where required, document chain of custody, and do not accept restitution informally.
Worked example
Analytics show a vendor’s address matches an employee’s home address, and the vendor was added just below the approval threshold. Reasoning: this suggests a conflict of interest, a shell vendor, or bid manipulation. Do not interview the employee first. Preserve vendor files, approval records, and emails; compare the vendor’s bank account with payroll records; confirm whether services were actually delivered; then involve counsel. Small anomalies matter because fraud is usually hidden in routine-looking transactions, and early disclosure can destroy evidence.
Traps that cost marks
- Assuming the external audit is designed to detect fraud.
- Tipping off a suspect before evidence is secured.
- Altering or “cleaning up” records to correct an error.
- Watching only cash theft while ignoring procurement and payroll.
- Accepting repayment as a resolution instead of following policy and law.