Friday, December 7, 2012

The Fraud Triangle

Fraud in U.S. businesses has become a very serious issue and  continues to grow.  All we need to do is look at the number of cases  on the news or in the paper to realize it is rampant in our society.  A recent study showed that seven out of 10 companies are experiencing or have experienced fraud.  That is a huge number! 

Donald Cressey developed a simple model called the Fraud Triangle to help explain why people commit fraud.   Think of a simple triangle and place “Pressure” on one leg. “Pressures” could include such problems as gambling debts, IRS issues, drug addiction or the need to show increasing profits to shareholders.  Place “Opportunity” – such as being in a trusted position with access to company accounts – on a second leg such of the triangle.  Finally, place “Rationalization” on the third leg.  Rationalization occurs before the crime and gives the individual an excuse to justify the crime in his or her mind.  Examples of these excuses could include rationalizations like the company owes me, they can afford it, my boss is a jerk, or I haven’t gotten a raise in years, etc. 

The Fraud Triangle provides a valuable structure for identifying how to reduce or avoid fraud.  By removing one leg of the triangle, the ability to commit fraud is reduced or eliminated.  The easiest leg for most employers to remove is the Opportunity leg.   Many methods exist for doing this including, maintaining an overview of an employee’s work, making sure employees take vacations, ensuring that an employee is not responsible for all aspects of important transactions such as handling both accounts payable and accounts receivable, and rotating an employee’s responsibilities. 

Many companies believe that fraud cannot happen in their company because they trust their employees.  One frightening statistic is that the longer an employee has been with a company, the more likely that person is to commit fraud.  Trusting your employees is great, but it is no reason to avoid internal checks and balances.  All companies need those controls in place to avoid potential catastrophic damage.  Seventy percent  of  all companies are experiencing or have experienced fraud.  Don’t let yours be one of these.

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