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Every organization needs to be familiar with the types of defalcation and fraud that may be perpetrated against them.

The basic rule in this regard is anything that appears too good to be true, is too good to be true and therefore is false. Critical to the ability to manage wrong-doing effectively is an understanding of how frauds and similar wrongs are perpetrated.

Conceptually speaking, there are two types of fraud that may touch or concern any organization: fraud committed “on us” (that is, fraud committed by the organization itself); and fraud committed “against us” (that is, fraud committed against the organization and of which it is the victim).

Both types are potentially destructive to the organization and therefore both should be of concern to its senior management. The commission of fraud by the organization itself divests the organization of credibility, will alienate both customers and suppliers, and may lead to criminal prosecution or civil actions against the organization.

As we are seeing in the United States with the President Donald Trump “DOGE” cutting initiatives, massive waste and fraud would appear to have taken place in many areas of American government departments.

Although fraud of this type is said to be committed by the organization, in the vast majority of cases it is motivated by the personal interest of the staff members who are involved in its commission.

In some cases, they commit fraud to cover poor performance or to earn a promotion or a higher commission or otherwise qualify for bonuses and other incentive programs by the organization.

Common types of fraud committed by an organization include the following:

• Billing for services not provided;
• bogus insurance claims;
• billing of services provided but at a higher rate than permitted;
• incorrect diagnosis of customer problems or use of unnecessary procedures to maximize payments;
• churning, providing excessive service to justify higher fees;
• payment of kick-backs and other forms of bribery and graft; and
• misrepresentation of information, especially with regard to sales of products or service or with regard to the issue of securities.

I would suggest every organization needs to consider the types of screening process, audit and other verification mechanisms that are necessary to prevent and detect such schemes.

The costs of control are only a tiny fraction of the cost of trying to repair the reputation of the organization if misconduct is allowed to thrive.

Frauds and similar wrongs committed directly against the organization may be committed by customers, suppliers, employees and outsiders.

Frauds by suppliers are essentially the inverse of the type of frauds that may be committed by the organization itself.

Frauds by customers generally fall into fairly common categories. These may include:

• Outright theft;
• obtaining supply of a service or product without paying for it, including allowing a person who has not paid a membership of subscription fee to make use of the service connected with that fee;
• enrolling an ineligible person for coverage; and
• fabricating warranty or other similar contra-clams.

Frauds and other wrongs committed against the organization by employees may be similarly classified:

• Theft of property belonging to the organization, ranging from embezzlement, to the pilfering of equipment and supplies, to the stealing of customer lists and other proprietary information;
• failure to bill customers properly for goods or services provided (invariably the customer will either have paid the employee to secure those or the customer and employee will be at non-arm’s length);
• destruction and misuse of property belonging to the organization; and
• conspiracy with customers and suppliers against the interests of the organization.

Often in retrospect, it sometimes seems organizations have positively dared their defrauding employees or suppliers to cheat by failing to use the most elementary techniques to deter them from doing so.

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.