0:00:05.260,0:00:06.639 What is fraud? 0:00:07.090,0:00:09.569 Fraud is any intentional act to deceptively 0:00:09.569,0:00:12.319 or unfairly take another's property or money. 0:00:12.619,0:00:14.720 The fraud triangle highlights how pressure, 0:00:14.779,0:00:15.760 rationalization, 0:00:15.890,0:00:18.639 and opportunity combine to heighten fraud risk. 0:00:18.809,0:00:20.569 When these three components converge, 0:00:20.690,0:00:22.120 fraud will likely occur. 0:00:22.370,0:00:25.610 Removing one or more of these components can deter fraud. 0:00:26.000,0:00:30.219 We often attribute fraudulent activity to individuals who are simply dishonest. 0:00:30.389,0:00:30.879 However, 0:00:31.030,0:00:32.069 over long careers, 0:00:32.470,0:00:36.220 everyone will face incentives or pressures to do things they would normally not do. 0:00:36.470,0:00:37.830 With the right conditions, 0:00:37.990,0:00:41.349 even historically honest people will make poor decisions. 0:00:41.509,0:00:45.310 Pressures may be created by family illness and related medical bills, 0:00:45.470,0:00:46.380 excessive debt, 0:00:46.669,0:00:48.389 addiction to drugs or gambling, 0:00:48.400,0:00:50.220 or simply a lavish lifestyle. 0:00:50.669,0:00:54.459 Don't fall into the trap of thinking that simply hiring honest people is enough. 0:00:54.669,0:00:55.389 It isn't. 0:00:56.139,0:00:58.810 While employees may face pressures to act poorly, 0:00:58.979,0:01:01.740 if they rationalize why it's acceptable to act upon them, 0:01:01.830,0:01:03.389 the pressures are enhanced. 0:01:03.740,0:01:06.690 Some individuals may initially intend to pay back stolen money, 0:01:06.940,0:01:09.050 while others may believe the amount is insignificant, 0:01:09.110,0:01:10.139 and no one will notice. 0:01:10.989,0:01:13.059 Some may believe they've been treated unfairly, 0:01:13.269,0:01:15.220 and they deserve what they're able to steal. 0:01:15.669,0:01:18.819 Individuals may feel wronged if they're passed over for a promotion 0:01:19.069,0:01:21.430 or feel underpaid when compared to a coworker. 0:01:22.470,0:01:25.339 Opportunity exists when an individual has the ability 0:01:25.339,0:01:28.230 to take cash or other assets without detection. 0:01:28.589,0:01:29.690 To minimize opportunity, 0:01:29.870,0:01:33.050 an entity should ensure internal controls are properly designed, 0:01:33.269,0:01:33.900 implemented, 0:01:33.980,0:01:35.120 and enforced. 0:01:35.750,0:01:37.900 Imagine you're at a high school football game. 0:01:38.150,0:01:41.019 If the gate attendant collects cash as people enter the game, 0:01:41.269,0:01:44.059 there's nothing that will prevent the attendant from stealing the cash. 0:01:44.419,0:01:44.940 However, 0:01:45.269,0:01:48.550 most high schools have a ticket office that sells pre-numbered tickets which 0:01:48.550,0:01:51.589 are given to the gate attendant who admits people into the game. 0:01:52.180,0:01:56.050 The control is completed when the number of tickets sold is multiplied by 0:01:56.050,0:01:59.319 the cost of admission to determine how much money should be received. 0:02:00.010,0:02:02.510 This amount is then compared to actual receipts, 0:02:02.519,0:02:04.949 and significant differences are investigated. 0:02:05.360,0:02:09.880 Opportunity is the only fraud triangle component entirely within management's 0:02:09.880,0:02:12.750 control and must be present for fraud to occur. 0:02:13.320,0:02:15.509 Imagine a justice court clerk is responsible 0:02:15.509,0:02:18.199 for receiving court fine payments from defendants 0:02:18.479,0:02:21.470 and has done so for many years without any known problems. 0:02:21.800,0:02:24.399 The judge periodically orders fine adjustments, 0:02:24.410,0:02:26.000 and the clerk is made responsible for 0:02:26.000,0:02:28.479 entering these adjustments into the accounting system. 0:02:28.919,0:02:31.369 In addition to already receiving the payments, 0:02:31.619,0:02:33.750 the clerk now has opportunity to zero 0:02:33.750,0:02:36.259 out the defendant's account in the accounting system 0:02:36.470,0:02:38.460 and steal cash without detection. 0:02:39.029,0:02:40.539 After a few years of employment, 0:02:40.699,0:02:45.350 the clerk has a child become ill and begins to incur high medical expenses. 0:02:45.509,0:02:47.470 These expenses make it impossible for the 0:02:47.470,0:02:49.910 family to meet its basic financial obligations, 0:02:50.110,0:02:52.029 which adds pressure to the situation. 0:02:52.660,0:02:56.889 The clerk eventually decides to borrow the money and rationalizes the decision 0:02:56.889,0:02:59.360 with an intention to pay the money back in the future. 0:02:59.570,0:03:00.970 As a result of opportunity, 0:03:01.250,0:03:01.649 pressure, 0:03:01.690,0:03:02.919 and rationalization, 0:03:03.199,0:03:05.479 the clerk made the poor decision to steal. 0:03:05.929,0:03:06.440 Remember, 0:03:06.649,0:03:08.320 management can limit opportunity, 0:03:08.529,0:03:10.729 the most important fraud triangle component. 0:03:11.169,0:03:13.970 Too often people we least suspect commit fraud. 0:03:14.169,0:03:16.119 Your entity may have honest people, 0:03:16.279,0:03:20.320 but to effectively protect employees from a momentary lapse of judgment, 0:03:20.449,0:03:22.559 sufficient oversight is a must. 0:03:22.970,0:03:23.559 Remember, 0:03:23.850,0:03:27.440 just the safety equipment is necessary to keep construction workers safe, 0:03:27.539,0:03:29.000 an entity must design, 0:03:29.169,0:03:29.800 implement, 0:03:29.850,0:03:33.440 and enforce internal controls to keep honest employees safe. 0:03:33.690,0:03:34.679 For more information, 0:03:34.970,0:03:37.479 see our fraud risk assessment implementation guide 0:03:37.479,0:03:39.570 and separation of duties digital short.