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