October 3, 2023

Obligate Law

Professional Law Makers

How To Detect And Prevent Fraud

4 min read


• The greatest challenge facing the banking industry globally today is fraud.
• The banking industry loses billions of dollars annually to fraudulent activities.
• Some of the frauds are executed successfully by outsiders while a reasonable number is successfully perpetuated with the connivance of an insider/staff.
• Anyone can perpetuate a fraud.


Below are some false assumptions about fraud:

1. Most people will not commit fraud.
Response: A vast majority of people, under certain circumstances, will commit fraud especially if they are convinced that it will go undetected. Therefore everyone should be assumed to have a tendency to commit fraud.

2. Fraud is not material.
Response: Fraud is very material and it is capable of eroding the working capital of any organization which consequently results to illiquidity and insolvency.

3. Most fraud goes undetected.
Response: Most frauds are detected over time especially if due process and procedure is followed.

4. Fraud can be well concealed and the auditor can’t detect it.

Response: There is usually a loop hole that will eventually come to the open. With a sound internal control procedure, such fraud will eventually be detected.

A well trained auditor can easily detect a fraud following properly designed audit program.

5. Those who are caught and prosecuted are not wise.
Response: The staff with fraudulent intentions think that those caught are not smart and the mindset of a first-time fraudster is either: I’m just going to do it once or, I’m too smart to get caught.


Common types of fraud in banking include the following:

1. Cheque substitution
2. Cheque Suppression
3. Cheque cloning
4. Cheque kitting
5. Cheque alteration
6. Teeming and lading
7. Claiming unearned overtime allowance
8. Dry posting
9. Accumulating charges due from unauthorized and unofficial long duration phone calls
10. Overstating claims for reimbursement
11. Deposit suppression
12. Adding fictitious names to the payroll
13. Overcharging customers
14. Removing money directly from vault, till box, petty cash etc
15. Obtaining payments for false invoices either self-prepared or obtained supplier or vendor (e.g. Hotel, air ticket etc).


• Growing complexity in the structure of an organization
• Increasing speed of transaction dynamics
• Improved technological advancement which aid the ease with which transactions are concluded
• History of inattention of supervisors
• Understaffing which could cause a breakdown of dual control
• Acceptance of some level of fraud as ‘cost of doing business’.
• Outdated and ineffective control measures that do not meet acceptable global standard.
• Increase in staff turnover which technically could lead to understaffing
• Aggressive accounting entries all in the bid to post profit.


The following are characteristics of a fraudulent staff which should put supervisors and associates on guard:

1. An employee who regularly borrows small amounts of cash from other colleagues
2. An employee who asks to “hold” his or her personal cheque before negotiating it
3. A staff who frequently closes late and does not go on vacation.
4. Low or inadequate salary levels employees
5. Employees who show resentment at not being treated fairly or being taken advantage of
6. Superiors who lack respect and appreciation for employees
7. Highly domineering senior management
8. Employees who appear to be living, and spending above their means
9. Split purchases
10. Bid process irregularities
11. Same bidders time and time again
12. Payment of invoices from a copy rather than an original
13. Unusual sequence of numbers on vendor invoices


Fraud has far reaching effect on the organization and the society at large.

• Fraud can deplete the working capital of any organization which will culminate ultimately to distress.
• Disengagement of staff and the associated social hazards to the staff and his dependant.
• Loss of confidence of customers, suppliers, creditors, contractors and shareholders on the organization and the industry.


1. Assume everyone can commit fraud under the right circumstances.
2. Use your knowledge of internal control to “think dirty” and then check out your suspicions.
3. Remember that good documentation does not mean something happened; only that someone said it happened.
4. Pay attention to documents themselves and the supporting paperwork, observing the consistency of numbers, dates amount.
5. Consider the reasonableness of account balances and accounting entries, especially adjustments
6. Develop relationships and pay attention to hints or rumors of wrongdoing. Follow up. Remember that people are often torn between their moral standards and their reluctance to get involved. They seldom tell all they know in the first interview.
7. Check out hunches; first impressions are often right.
8. Be inquisitive; don’t easily accept explanations, especially if you don’t understand them.
9. Use statistical sampling to force you to look at items you would not generally otherwise examine
10. Look for patterns of unusual transactions. (If you’re surprised, it’s unusual!)


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