Learn about the fraud triangle and what you can do to help prevent fraudulent behavior in your business.

11.5.15

 By Susan Burnoski, Senior Manager/Director Audit & Assurance

Susan Burnoski

Fraud is a big deal for any business. According to the Association of Certified Fraud Examiners via its yearly Report to the Nations, the average organization loses roughly 5 percent of its yearly revenues to fraud.

Internal fraud is something organizations should keep in mind all of the time. When things are going well, people don’t really think about fraud, and that’s a good opportunity for certain motivated people to commit fraud.

So why do people commit fraud? The easy answer is that they do it out of greed, but there’s more to the crime than just that. People need certain motivations to be driven to steal from their company. The Fraud Triangle presents three factors that can make an employee consider internal fraud:

  • Pressure
  • Rationalization
  • Opportunity

Once those elements fall into place, the idea of fraud becomes more of a possibility. While the end goal may be the same, all three parts of The Fraud Triangle start off with different ideas.

The Pressure to Commit Fraud

Bad situations can lead to bad decisions. Employees in stressful situations can see fraud as an easy way to eliminate their problems.

Pressure can also be caused by other people. A spouse, relative, or friend might push a person down the fraudulent path. Even another employee looking to commit fraud may pressure another if that coworker would be needed to complete the crime. Pressure can force a variety of human responses, and sometimes that can lead to internal fraud.

While stealing business funds is the most commonly thought of type of fraud, it’s not the only way employees can hurt businesses. Other types of fraud can include:

  • Internal theft of business property, which can be as small as someone taking office supplies home with them to making off with inventory of larger value
  • Abusing vacation time
  • Claiming for benefits that an employee is not entitled to
  • Taking advantage of travel and expense reimbursements

An employee enduring enough pressure can be driven to illegal activities, whether it’s stealing money or abusing other internal systems.

The Rationalization That Fraud is Okay

Rationalization can come in multiple forms. Sometimes it’s a justification. An employee who hasn’t gotten a raise in 10 years may feel the company owes him or her, so the person commits fraud to try and get the money he or she feels is long overdue.

Fraud doesn’t have to result in the theft of big dollar amounts. An employee may justify that by stealing small amounts, what they’re doing isn’t all that bad. In truth, it’s always bad, but the person committing fraud may have him or herself convinced otherwise.

The Moment of Opportunity for Fraud

This is the biggest factor in The Fraud Triangle. Even if a person is under pressure to commit fraud or has rationalized the idea to the point of no return, it’s impossible to commit fraud without having an opportunity to do so.

Take the story of a local library worker for example. As the deputy fiscal officer for a city library, the individual was the only employee who oversaw the library’s cash collection each day. This presented her with the opportunity to skim small amounts of money off of fines for overdue items and printer fees.

While that might not sound like she would have been able to do too much damage, she ended up stealing nearly $370,000 between 2007 and 2013. There was nobody else at the library that was required to check her work, so she was able to commit fraud until someone finally notice that something was awry. She may have been under some pressure or rationalized the decision, but without the opportunity and ability to commit fraud, the library wouldn’t have suffered.

business crime concept with handcuffs and dollar

What You Can Do to Prevent Fraud

You can’t change rationalization and you can’t change the potential pressure that an employee faces, but you can prevent opportunity. If you have good internal controls in place, you’ll limit potential cases of fraud and protect your organization from people affected by The Fraud Triangle’s temptations.

Make sure to take a look at your company’s internal controls to ensure you are employing checks and balances to protect the organization. Apple Growth Partners can help you conduct an internal control review and help identify potential weaknesses that can be exploited.

Whether business is good or bad, you always have to be on the lookout for fraud. You can’t stop the temptations, but you can do your best to stop fraud before it becomes a possibility.

Request a free Healthy Growth Analysis of your company today.