Which Type of Fraud is Riskiest?

In this video lesson, our risk & fraud expert, Richard Barr, talks about which type of fraud is riskiest: internal or external fraud?

Learn how to manage and prevent fraud with our Risk Management – Focus on Fraud training.

Update: we’ve added the transcript of the above video below.

So today I want to approach the topic of fraud with you.

I don’t want to commit fraud of course, but you might need it very much and I’d like you to like me, so what I’m going to do is talk a little bit about fraud on one specific level, that is – where are we at a bigger risk – Internal Fraud or External Fraud?

When you think about it – in terms of Internal Fraud – it comes from our employees and our staff. But we know our employees and our staff, right? We hire them; we vett them; we know who they are; we go to birthday parties and celebrations with them, so we should be at less of a threat of fraud from our employees, from our family, (the risk of) Internal Fraud should be lower.

External Fraud, coming from people we don’t know, coming from vendors and others that we allow access to our systems; that we don’t know or aren’t familiar with. You’d think that the bigger fraud threat would be coming from them. The answer is: No, it isn’t.

The reason it isn’t is for the exact reason I told you why it should be: we don’t know our external parties as well. Because we don’t know our external parties as well, we are already vigilant. We are already aware. We already tried and put up as many preemptive and mitigating blocks in front of the potential fraudster. So, we are very well catered for. Are we perfect? No. We are not perfect. We need to improve on that. We always need to visit that and revisit that and to tighten our mitigating controls. So, we always need to be vigilant on that.

Where we are at a greater risks are from the people we do know: our employees. I don’t think we set out to hire criminals. I really don’t. I don’t think that most of the people, or, even all the people we hire, are criminals. They may become criminals. They may become fraudsters after we’ve hired them. We’ve already opened the door, we’ve already shown them what’s there, and we are less vigilant. Why? Because we have to trust them, we have to trust our employees on a level that we don’t need to trust in the external party. Our employees are how we do our business. Without them, we wouldn’t be able to operate. So, we allow them access to information; we allow them access to cash; we allow them access to connections and to databases. We have to, but we also use a higher level of trust as a control. Now, trust is a control. Nothing wrong with trust, but it shouldn’t be the only control.

Trust by itself is not enough of a control. It’s no control at all. We also need to have controls on top of that. Things like dual custody, our computer systems which allow limited access, our policies and procedures, all of those things work with trust in order to mitigate the risk that we are involved with when it comes to Internal Fraud.

Now, it doesn’t mean we can stop there. We must, again, just like the External Fraud, with Internal Fraud, we have to go ahead and re-visit our policies and procedures, re-visit the level of trust that we are giving to our employees and continue tightening those controls to mitigate that level of fraud that occurs. Will we be able to eliminate fraud by doing that? No. But we can bring it down to such a low level. It’s a loss that we can afford, that we can accept.

If you want to know more about fraud and all the details that are involved with, then enroll in our 2-day course. You should come and attend, speak with me, visit with me, and it’s quite interactive. I hope to see you there. Thanks for listening.

Learn how to manage and prevent fraud with our Risk Management – Focus on Fraud training.

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