Question

Which of the following is not a proactive way for a company to eliminate fraud opportunities?

1) Implementing appropriate preventive and detective controls
2) Severely punish fraud perpetrators
3) Creating widespread monitoring of employees
4) Assessing risks

Answer 1

Severely punishing fraud perpetrators is not a proactive measure but a reactive one; proactive methods aim to prevent fraud from occurring by implementing controls, monitoring, and risk assessment. Thus the option 2 is the correct answer.

Step-by-step explanation:

The question asks which of the following is not a proactive way for a company to eliminate fraud opportunities: 1) Implementing appropriate preventive and detective controls, 2) Severely punish fraud perpetrators, 3) Creating widespread monitoring of employees, 4) Assessing risks. Of these options, the least proactive method in eliminating fraud opportunities is option 2) Severely punish fraud perpetrators. Punishment is a reactive strategy rather than a proactive measure. Proactive measures are those that prevent fraud from occurring in the first place, such as implementing controls, monitoring, and assessing risks, which align with the ways in which insurance companies work to reduce moral hazard such as by incentivizing the installation of minimum level of security and fire sprinkler systems and conducting regular inspections. By contrast, punishment is administered after fraud has been detected and does not prevent the initial opportunity for fraud.