Developments in technology have made new proactive fraud detection techniques possible. One approach using technology that appears to be effective in detecting fraud against organizations is a combination of deductive reasoning and technology---a method we call strategic fraud detection.  This paper presents a model formalizing and describing the strategic fraud detection approach and shows how the use of information systems and technology provide effective ways to detect fraud. The model includes the following six stages: (1) understanding the business, (2) identifying all possible frauds that could occur, (3) cataloging possible symptoms for each type of fraud, (4) using technology to gather data about symptoms, (5) analyzing and refining results, and (6) investigating identified symptoms. Two optional steps of (7) following up on suspected frauds and (8) automating fraud detection procedures are also discussed. Two case studies---one of known fraud and one of unknown fraud---are used to build and test the approach.  The case studies provide evidence that, while needing additional testing, the strategic fraud detection method described in this paper is effective in the early detection of fraud.

 

 

Figure 1: Categorization of Fraud Detection Methods

Figure 2: Strategic Fraud Detection Approach

Figure 3: Fraud Symptoms for Kickbacks