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The 10-80-10 law and an overview of business fraud risk

July 6, 2020 – David W. Foley – Uncategory

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Auditors for businesses, including large corporations, focus on fraud detection and the likelihood of fraudulent activity occurring within the company.

Fraud investigators operate on what they call the “10-80-10” law. What is this, and how does it affect those who are under investigation for fraud?

Why fraud occurs

Studies indicate that most people do not initially seek to commit fraud; rather, they take advantage of opportunities. For example, a bookkeeper might process the same invoice twice. When the payee does not recognize the mistake, the opportunity to repeat this kind of activity arises and becomes increasingly easy to accomplish.

In addition to opportunity, fraud normally develops as a result of rationalization and pressure. When an opportunity arises, someone may rationalize that no one will notice and various kinds of pressure may lead to action. For example, someone may need more money to pay personal bills. Or, the desire for revenge against the company may surface under certain circumstances.

What the 10-80-10 law is

The 10-80-10 law refers to the experts’ belief that 10% of the people will never engage in a fraudulent activity, 80% will commit fraud if the right circumstances exist and another 10% will look for opportunities to commit fraud. In the business world, fraud is likely to occur either where internal control is weak or someone in a position of trust takes advantage of his or her power.

When an investigation begins

An investigation for fraud in the business world can take months, if not years, and usually involves teamwork between federal and state agencies. It is a common form of white collar crime that is steadily increasing, but the penalties for someone who receives a fraud conviction are serious. They include heavy fines and prison time, which is why it is essential to begin building a defense at the earliest indication that an investigation is either about to begin or is already underway.

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