What exactly is the fraud triangle and a better question is how does it apply to you? One thing to know about the fraud triangle is that it is designed to help explain why internal fraud occurs. Like most triangles, it has three points that make it what it is. These three components are Opportunity, Pressure, and Rationalization. In order for fraud to occur these three variables must be present in some form.
Like any situation, there is a driving force that causes that situation to occur. In the case of fraud, pressure is the reason behind why someone commits fraud. There are two general types of pressure. One can be caused by personal issues which creates a demand for more money. This can range from drug or gambling problems to medical procedures that cannot be afforded. The other can be unrealistic goals that are set by top management. The first problem can not be prevented as much as it can be detected by knowing and understanding your employees. The second comes directly from the tone at the top and management should realize that goals should be attainable in order to prevent employees from having to bend rules to reach them.
For rationalization, we can break it down into two separate pieces. First, the fraudster must be able to rationalize that the reward from committing the fraud will outweigh the punishment. The second and perhaps more of a result of the first two pieces of the triangle is the ability to say that they deserve what they are stealing. Typically, the pressures that cause them to commit fraud in the first place often become the reason for rationalization. The fraudster will begin to see themselves as the victim in the situation and deem that they are only making things “right” by taking what is owed. While there may not be much that can be done directly to prevent this, there are several things that can be done to potentially help. Providing the proper tone at the top is essential as well as having annual training on fraud.
Perhaps one of the most essential pieces of fraud is the opportunity to commit fraud. When there is too much trust in employees this can sometimes lead to employees taking advantage of this trust. In most small organizations, opportunity can run abundant when there is a lack of oversight or lack of segregation of duties. In these small organizations where there are few employees, it gives certain employees too much access without proper oversight. It is essential that the board be involved for smaller nonprofits and have a review process in place to help increase oversight and limit the amount of opportunity. For any organization, there should be internal controls in place that are helping to limit that amount of opportunity available to a potential fraudster. Of the three points, management has the most direct impact on being able to stop opportunity and should be diligent in being aware of the effectiveness of the internal controls in place.
Do you suspect fraud in your business and don’t know what to do? Read this article.
If you have any questions about the fraud triangle, or fraud in general, please don’t hesitate to contact a Henry+Horne professional. For more on how Henry+Horne can help you with potential fraud, head over to our litigation+valuation page.