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What is fraud?

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Fraud is any intentional act to deceptively

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or unfairly take another's property or money.

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The fraud triangle highlights how pressure,

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rationalization,

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and opportunity combine to heighten fraud risk.

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When these three components converge,

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fraud will likely occur.

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Removing one or more of these components can deter fraud.

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We often attribute fraudulent activity to individuals who are simply dishonest.

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However,

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over long careers,

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everyone will face incentives or pressures to do things they would normally not do.

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With the right conditions,

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even historically honest people will make poor decisions.

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Pressures may be created by family illness and related medical bills,

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excessive debt,

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addiction to drugs or gambling,

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or simply a lavish lifestyle.

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Don't fall into the trap of thinking that simply hiring honest people is enough.

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It isn't.

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While employees may face pressures to act poorly,

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if they rationalize why it's acceptable to act upon them,

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the pressures are enhanced.

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Some individuals may initially intend to pay back stolen money,

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while others may believe the amount is insignificant,

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and no one will notice.

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Some may believe they've been treated unfairly,

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and they deserve what they're able to steal.

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Individuals may feel wronged if they're passed over for a promotion

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or feel underpaid when compared to a coworker.

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Opportunity exists when an individual has the ability

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to take cash or other assets without detection.

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To minimize opportunity,

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an entity should ensure internal controls are properly designed,

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implemented,

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and enforced.

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Imagine you're at a high school football game.

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If the gate attendant collects cash as people enter the game,

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there's nothing that will prevent the attendant from stealing the cash.

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However,

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most high schools have a ticket office that sells pre-numbered tickets which

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are given to the gate attendant who admits people into the game.

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The control is completed when the number of tickets sold is multiplied by

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the cost of admission to determine how much money should be received.

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This amount is then compared to actual receipts,

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and significant differences are investigated.

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Opportunity is the only fraud triangle component entirely within management's

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control and must be present for fraud to occur.

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Imagine a justice court clerk is responsible

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for receiving court fine payments from defendants

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and has done so for many years without any known problems.

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The judge periodically orders fine adjustments,

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and the clerk is made responsible for

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entering these adjustments into the accounting system.

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In addition to already receiving the payments,

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the clerk now has opportunity to zero

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out the defendant's account in the accounting system

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and steal cash without detection.

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After a few years of employment,

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the clerk has a child become ill and begins to incur high medical expenses.

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These expenses make it impossible for the

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family to meet its basic financial obligations,

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which adds pressure to the situation.

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The clerk eventually decides to borrow the money and rationalizes the decision

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with an intention to pay the money back in the future.

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As a result of opportunity,

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pressure,

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and rationalization,

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the clerk made the poor decision to steal.

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Remember,

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management can limit opportunity,

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the most important fraud triangle component.

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Too often people we least suspect commit fraud.

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Your entity may have honest people,

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but to effectively protect employees from a momentary lapse of judgment,

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sufficient oversight is a must.

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Remember,

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just the safety equipment is necessary to keep construction workers safe,

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an entity must design,

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implement,

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and enforce internal controls to keep honest employees safe.

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For more information,

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see our fraud risk assessment implementation guide

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and separation of duties digital short.