[Fraud Prevention] Reporting known incidents of fraud to law enforcement can be an effective fraud prevention mechanism.

The statement is correct. Reporting known incidents of fraud to law enforcement is a critical component of a comprehensive fraud deterrence strategy. This action creates a strong perception of detection and punishment. When employees and external parties know that an organization has a zero-tolerance policy and will pursue legal and criminal sanctions, it significantly increases the perceived risk associated with committing fraud. According to deterrence theory, a higher certainty and severity of punishment discourages potential offenders. Therefore, consistently reporting fraud acts as a powerful mechanism to prevent future incidents by reinforcing the organization's ethical tone and making it clear that such actions will have severe consequences.

This is a "True or False" question. The statement is not false because failing to report fraud can create a perception of impunity. If perpetrators face no legal consequences, it can signal to others that the organization is a soft target, potentially encouraging more widespread fraudulent activity. Ignoring fraud undermines the control environment and the ethical culture the organization seeks to promote.

1. Association of Certified Fraud Examiners. (2023). Fraud Examiners Manual

International Edition.

Section 4.401

"Creating a Culture of Honesty and High Ethics": This section emphasizes that a key element of fraud prevention is establishing a culture where fraud is not tolerated. The manual states

"Employees must believe that if they are caught

they will be punished. The organization’s policy on punishment must be communicated to employees." Reporting to law enforcement is the primary method for formal

external punishment.

Section 4.402

"Assessing the Risk of Fraud and Developing a Concrete Response": This section discusses that a concrete response to fraud includes taking legal action. "One of the most effective fraud deterrence measures is the prosecution of offenders... When employees know that they will be prosecuted for their fraudulent acts

they are less likely to commit them."

2. Association of Certified Fraud Examiners. (2022). Occupational Fraud 2022: A Report to the Nations.

Page 60

"Case Outcomes": The report details the outcomes of fraud cases

noting that 58% of cases were referred to law enforcement. While organizations may choose civil litigation or internal discipline

referral for criminal prosecution sends the strongest deterrent message. The report's emphasis on proactive controls is predicated on the idea that detection leads to consequences

which in turn deters future acts.

3. Albrecht

W. S.

Albrecht

C. O.

Albrecht

C. C.

& Zimbelman

M. F. (2019). Fraud Examination (6th ed.). Cengage Learning.

Chapter 5

"Preventing Fraud": This university-level textbook explains that creating an expectation of punishment is a fundamental fraud prevention control. It states

"A second effective way to prevent fraud is to have a good system of controls... that make it difficult for perpetrators to commit fraud and

very importantly

that include the expectation that perpetrators will be caught and punished." Reporting to law enforcement is a primary method of ensuring such punishment.