What is Fraud?

Black’s Law Dictionary defines fraud as “a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.”

Essentially, fraud is any crime that uses deception to deprive another person or entity any valuable item, be it tangible or intangible. Fraud is accomplished through deceit, treachery, dishonesty, or other unfair means and has the element of deliberate intent.

Fraud against TDOT can be accomplished in two ways, either internally by employees, managers, officers, or externally by customers, vendors, and other parties

  • Internal Fraud, also called occupational fraud, is the use of one’s position for personal enrichment and financial advantage through the deliberate misuse or misapplication of TDOT resources or assets. This type of fraud occurs when a TDOT employee, manager, or executive commits fraud against the Department.
  • External Fraud occurs when the deceptive practice is perpetrated by outside parties to deprive TDOT of its resources. It covers a broad range of activities that include schemes by dishonest contractors, vendors, or grantees.  The schemes could include over-billing, bid-rigging, product substitution, and false reimbursements, just to name a few.

These days, TDOT also faces fraud using electronic means, threats like security breaches to our computer systems, identity theft, email phishing, and advanced-fee scams, just to name a few.  All of these are devised by criminals to steal money from unsuspecting individuals or groups of people.

The best and most widely accepted model for explaining why people commit fraud is the fraud triangle. The fraud triangle was developed by Dr. Donald Cressey, a criminologist who studied confidence scams, and embezzlers.

graphic of fraud triangle with motive, opportunity, and rationalization as points

His study indicated that for fraud to occur, whether the fraudster is the direct or indirect beneficiary, three elements must be present. First, fraudsters are faced with some kind of motive or pressure. Most of the time it is financial, but it could be a host of other life factors. Secondly, there must be a perceived opportunity to commit the defalcation. Usually, opportunities present themselves because the fraudster is in some trusted position or has access to the assets. Finally, fraudsters must have some kind of rationalization that makes their unethical behavior seem acceptable to them. The rationalization may include the feeling that they are owed the resources, entitled to it, or even committing the fraud to give them some form of equitable justice.

The problem of fraud should be attacked from three different directions. Prevention is the most cost-effective option and is employed through proper internal controls. Detection normally occurs through diligent supervision and reviews.  Catching fraud requires both quantitative analysis and investigative techniques. No matter what option TDOT uses, breaking the Fraud Triangle is the key to fraud deterrence. Breaking the Fraud Triangle implies that TDOT must remove one of the elements in the fraud triangle in order to reduce the likelihood of fraudulent activities. Opportunity is the only element TDOT can directly influence because it is affected by internal controls; therefore, instilling sound internal controls provides the most viable route to fraud prevention.