Fraud Prevention: Having A Plan

Growing up in northeast Ohio, I’ve never actually seen a tornado up close or personally know anyone affected by a tornado touching down in the area.  Even still, when a tornado watch alert is issued, I keep a close on eye on the weather for changing conditions and I stay close to home if possible.   Even in the smallest of ways, a simple thing such as a tornado watch in an area where we just don’t see many tornadoes, if any, causes us to prepare for one.  This made me start thinking about the fraud triangle and why fraud occurs in organizations, which then led me to my question for all of you: “Should you issue a fraud watch within your organization?”. If so, how are you preparing for the fraud tornado?

Utilizing Fraud Triangle for Fraud Prevention 

Let me back up for just a moment to explain the connection. The Fraud Triangle consists of three elements:

  • Opportunity
  • Pressure
  • Rationalization

When these elements are present, fraud can occur. Similar to a tornado watch, when the right weather conditions are present, a tornado can occur. While local weather professionals are charged with identifying if all the right weather conditions are present to issue a tornado alert, who in your organization is doing the same to determine if the conditions in your organization are right for fraud?  Many individuals in leadership roles at organizations don’t look at all elements of the triangle in a comprehensive manner to identify fraud risks. Rather, there may be times when internal controls are evaluated and certain measures are taken to strengthen those controls.  Other times, organizational goals/metrics will be re-evaluated to determine what makes sense in the present economy so as not to create undue pressure on the system.  Rarely, however, does anyone look at all three elements at the same time and ask themselves, “Are there conditions present within our organization that we should be under a fraud watch?”.

Who Can Commit Fraud? 

The chart below provides examples of what each of these elements means.  In working with middle market, privately held companies, and non-profit organizations, I encounter this typical scenario:  limited personnel in key roles with minimal segregation of duties and organizations trying to do more with less.  If you begin to add significant amounts of trust and an employee under financial distress, experiencing other life pressures, or simply overworked in their current position, your triangle is complete.  I’ve often heard, “I’m doing the job of two people” or “I don’t know why I do this job for what I get paid?” Don’t be lulled into a false sense of security that your long-tenured, trusted employee(s) would never steal from you.  According to the ACFE’s 2020 Report to the Nations, 41% of cases involving fraud were committed by employees and 35% were committed by managers, with median losses over $200,000.  Getting that feeling in the pit of your stomach? Then maybe you should be re-evaluating your situation. In Part II of my blog, I’ll provide ways for you to further evaluate the elements of the fraud triangle.


(Chart: Association of Government Accountants)


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