Fraud is an expensive problem that could cost businesses as much as $50 billion in fraudulent chargebacks by 2025.

And, because fraud can take many forms, it’s extremely difficult to prevent it without a systematic approach and the right monitoring tools. Creating an effective fraud prevention program starts with a deep understanding of fraud risk. In this guide, we’ll look at the common fraud risk factors, why a fraud risk assessment is crucial to managing fraud risks, and how to get started with your own program to identify, manage, and mitigate the risk of fraud. 

What is fraud risk?

The federal Office of the Comptroller of the Currency (OCC), part of the Department of Treasury, defines fraud risk as “the risk to current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, human errors or misconduct.” 

Or, simply put, fraud risk is the possibility that an organization could be subject to fraudulent activity. The OCC categorizes fraud risk as external or internal. 

External fraud 

This refers to fraud committed by a person or entity that is not an employee, former employee, or partner engaged by the financial institution or business. External fraud is further broken down into: 

  • First-party fraud, in which an external party such as a customer commits fraud against the company.
  • Victim fraud, in which a bank customer or client is the victim of an intentional fraudulent act.

Internal fraud

This occurs when an employee, former employee, or partner of the financial institution or business commits or otherwise contributes to fraud. 

Fraud risk is typically quantified by a fraud risk assessment and expressed as a fraud score, which can vary depending on the type of fraud risk assessment you use. At, we use a Score Model that provides a risk score of 0-99 for every event or transaction. Generally speaking, there are certain risk factors that these assessments—and auditing firms—will take into account no matter what tool you use. 

What are the types of fraud risk factors? 

Fraud can take many forms, which is why so many schemes are successful. When evaluating fraud risk, auditors chiefly consider two types of fraud: fraudulent financial reporting and misappropriation of assets. Then, auditors classify risk factors further based on three conditions generally present when fraud occurs:

  1. Incentives/pressures: a person’s mindset towards committing fraud.
  2. Opportunities: the circumstances that allow fraud to occur.
  3. Attitudes/rationalizations: a person’s justification for committing fraud. 

These risk factors make up the “fraud triangle.” 

Managing fraud risks requires understanding the conditions that create the opportunity, enable rationalization, and provide incentives for committing fraud. 

Fraud risk factor: Incentive

Incentives for committing fraud can be both personal and professional. For instance, bonuses and net income can influence an employee to commit fraud. When bonuses are based on a specific metric, this can create pressure for a worker or manager to commit fraud to achieve the business objective. Likewise, high investor and analyst expectations can increase pressure to produce unrealistic results—similarly incentivizing fraud. 

Personal circumstances, such as gambling addiction or debt, can also lead to fraud. Though these are harder to monitor, auditors and fraud analysts should also factor these risk factors into their fraud risk management strategy. 

Fraud risk factor: Opportunity

The opportunity fraud risk factor is perhaps the risk factor for which companies can prepare best. Most fraud risk management tools and strategies seek to eliminate the opportunity for someone to commit fraud altogether. This approach means addressing issues such as:

  • Poor internal controls
  • Lax leadership
  • Inadequate accounting policies

“Weak internal controls such as poor separation of duties, lack of supervision, and poor documentation of processes give rise to opportunities for fraud,” wrote the Corporate Finance Institute. Poorly organized accounting processes and a leadership team that doesn’t instill a culture of integrity can contribute to this risk factor. 

Fraud risk factor: Rationalization

Finally, rationalization is the justification someone uses to overcome guilt and commit fraud. Common rationalizations include thoughts like “I’m being treated unfairly” (e.g., spite or revenge) as well as attitudes that tie into poor corporate oversight (“Upper management is doing it too.”). Some people may also feel they have no other option, either from personal debt or pressure from within the organization to meet expectations. 

How can companies manage fraud risks?

Fraud risk management can seem complicated given the many opportunities, incentives, and justifications that internal and external stakeholders are navigating. To better understand the unique factors that play a role in your company, start with a fraud risk assessment. 

A fraud risk assessment can specifically help address the opportunity side of the fraud risk triangle. The right assessment will identify weaknesses in controls that present a fraud risk to the organization. Once a risk is identified, a plan can be developed to mitigate those risks by instituting controls or procedures and assigning individuals to monitor and effectuate the mitigation plan.

Part of a fraud risk management plan should include ongoing fraud detection, especially for financial transactions. At, we build custom machine-learning models, leveraging patent-pending methodologies to give a unique fraud score for each transaction. Every record is given a score of 0-99, with 0 indicating the lowest risk of fraud. Clients can prioritize reviews of transactions based on risk and can take real-time action based on risk groups to reduce queue size and optimize investigator or review agents’ time. 

How can you get started revamping your fraud risk program? We offer a free fraud analysis to help you understand the risk factors in your organization and recommend solutions to increase protection. Learn more about’s solutions by signing up for a demo today.