Fraud risk factors – events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud.

Fraud risk factors are crucial elements that can signal the likelihood of fraudulent behavior within an organization or system. They typically fall into three primary categories:

1. Incentives/Pressure: These are circumstances that motivate individuals to commit fraud. Examples might include:

   • Financial difficulties or personal debts that create pressure to obtain money.
   • Performance-based compensation that emphasizes meeting targets, potentially encouraging unethical behavior.
   • Competitive pressures that drive employees to manage profits aggressively.

2. Opportunity: This refers to the possibility for fraud to occur, often arising from weaknesses in internal controls. Examples include:

   • Lack of adequate supervision and oversight of financial transactions.
   • Weaknesses in internal control systems that allow for manipulation of financial records.
   • Access to financial systems or assets without sufficient checks and balances.

3. Rationalization: This involves the mindset of the individual committing fraud, where they justify their actions as acceptable. For instance:

   • Believing that they are just "borrowing" money and will pay it back.
   • Feeling underappreciated or undervalued, leading them to justify their actions as a form of compensation.
   • Viewing the organization’s policies or practices as unfair, which can lead to rationalizing fraudulent actions as a form of retribution.

It's important for organizations to recognize these factors to create an environment that mitigates risks and enhances ethical behavior.