Is Fraud Risk Assessment Simply an Academic Exercise?

Written by Leonard W. Vona | Jun 12, 2025 1:31:48 PM

Fraud risk assessment is alleged to be an essential part of protecting a company, but is it just an academic exercise?

I will let you be the judge.

I realize fraud risk assessments are prepared for many reasons. They are prepared by management, auditors, regulators, and risk managers. The expected outcome is to state that the organization has identified the risk and that internal controls manage the fraud risk to an acceptable level. Do I have this right?

The premise of this blog is that without industry knowledge, your fraud risk assessment is no more than an academic exercise to satisfy a standard. (As always, my goal is to make you think.)

So here is my question for you: Do you really understand fraud risk? I will illustrate my concerns by evaluating a common fraud risk: Vendor Overbilling. From a hierarchy perspective, vendor overbilling is the first level of fraud risk description. The second level has many stages, such as price inflation, short shipments, etc. There are many different schemes for over-billing, but let’s drill down on product substitution.

Product substitution refers to knowing and willful substitution by the provider without the purchaser's knowledge or consent.

To repeat my question, do you truly understand the fraud risk facing your organization? Do you realize that the scheme can be committed by the vendor, supplier, manufacturer, and/or a counterfeiter (which could be a vendor, supplier, or manufacturer)?. So let me illustrate a better description of the fraud risk. In each fraud risk statement, you can insert various variables. I call this the third level of fraud risk.

Supplier alone (or in collusion with an internal person) commits a product substitution scheme (or provides expired goods), resulting in warranty issues (or internal person receives a bribe for accepting expired goods).

Fitness issue
Knock-off scheme
Obsolete or expired scheme
Used, surplus, or outdated materials or components
Materials that do not conform to contract requirements

Manufacturer acting alone intentionally misstates the chemical composition of its goods, resulting in potential legal liabilities. This could include:

Chemical composition
Country of origin
False testing statements

Counterfeiter sells refurbished components to your company, resulting in damage to your company’s reputation. This could include:

Parts that do not contain the proper internal construction (die, manufacturer, wire bonding, etc.) consistent with the ordered part
Parts that have been used, refurbished, or reclaimed, but represented as a new product
Parts that have a different package style or surface plating than the ordered parts

While I think this is better, the outstanding question is: do I truly understand how and where the product substitution scheme could occur in your expenditure cycle? FYI, it is the same question for your revenue cycle.

Let’s assume you are in the food industry. And let’s examine product substitutions in the food industry. This is something we all purchase as we all eat. There are many opportunities for substitution, but let’s look specifically at seafood, which is among the most costly. Here are a few of the most common product substitution schemes involving seafood.

Supplier operating alone mislabels seafood as wild catch versus raised in a farm, resulting in potential reputation risk.
Fisherman (Manufacturer) mislabels sea bass or snapper when the actual fish is a less desirable fish, resulting in an intentional product substitution scheme.
Restaurants or grocery stores intentionally mislabel a less desirable fish, like sea bass or snapper, resulting in mischarging consumers.

To bring this academic exercise to life, let’s add some industry knowledge.

Fraud and Seafood

What do you know about the Seafood Fraud Report?

The lead authors of this report are Emily J. Spiegel, Professor of Law and Faculty Fellow in the Center for Agriculture and Food Systems at Vermont Law School, and Laurie J. Beyranev, Professor of Law and Director of the Center for Agriculture and Food Systems at Vermont Law School. They found:

As much as 85 percent of the seafood we eat in this country is imported. It comes to us via a complicated network of supply chains that span continents.
Fraud falls under five different categories. There are two legal issues, and the rest are consumer issues.
Believe it or not, tuna is first on the list for product substitution.
A common issue is fish of a lower value (say, tilapia or sometimes allergenic escolar) being mislabeled as fish of a higher value (red snapper or tuna)
Another issue is treating fish with too much water to make it heavier.
Also of concern, fish with a label that obscures where it came from, such as farmed Atlantic salmon touted as more desirable than wild Pacific salmon

To illustrate a real-life product example of substitution for seafood, I will provide one example out of hundreds. When you read it, you will see it’s like a chapter out of “Believe It or Not.”

Fake Caviar Source: Hakai Magazine

What’s worse than counterfeit caviar? Caviar that isn’t food at all. In Bulgaria and Romania, where caviar from other fish has been passed off as that of the local, prized sturgeon, German researchers working with WWF Austria discovered a few caviar samples that lacked any trace of animal DNA whatsoever. Their hunch was that this mystery product contained completely artificial ingredients that defied identification. Since genuine caviar carries one of the highest price tags of any edible animal product, there’s a strong incentive to sell it fraudulently to unsuspecting customers.

My Challenge to you!

Maybe you’re not buying caviar or selling sea bass, but what substitution risks do you have?

I challenge you to Google product substitution examples on major items that your company purchases. See what you find. Now ask: Do your internal controls mitigate fraud risk, or are you simply performing an academic exercise?

Next month, I will discuss why the traditional fraud risk assessment has become outdated. Yes, I am familiar with all the recent guidance.

Fraud Travia Lesser-known Fraudsters

1. Who was known as the great impostor? Ferdinand Waldo Demara
2. Elizabeth Bigley aka Cassie Chadwick. What was she famous for? She started a rumor that she was the illegitimate daughter of steel tycoon Andrew Carnegie, through which she was able to access loans and cash advances from an increasing number of lenders.
3. Who: Her 2008 memoir, Can You Ever Forgive Me? The person later became an Academy Award–nominated movie starring Melissa McCarthy. Lee Israel
4. Who was reportedly paid $320,000 by Netflix for the rights to turn her adventures into the 2022 limited series Inventing Anna, with Julia Garner portraying her onscreen? This person also competed on the ABC reality competition show Dancing with the Stars in 2024. Anna Delvey
5. This story also earned the Netflix treatment in the form of the 2022 documentary The Tinder Swindler. While the exposure led to his expulsion from dating sites and a lawsuit filed by a family known as the diamond family, this person has since signed with a Hollywood agent and wants to appear on his own dating show. Simon Leviev

Fraud Travia: The Great Imposter

1. What was the name of the movie for the Ferdinand Waldo Demara?
2. Who played Ferdinand Waldo Demara in the movie?.
3. What was the name of the college he created in Alfred Maine?
4. Demara had come to two beliefs; what were they?
5. Demara had two cardinal rules; what were they?
6. In what town was he born?
7. This town was famous for “bread and roses”. What was this?

View full post