Lessons from the Fraud Triangle

Fraud can occur when three elements are present: pressure, opportunity and rationalization. That’s the premise of the Fraud Triangle that I wrote about in last week’s column, “Why Fraud Occurs: The Fraud Triangle.”

So what lessons can we learn from these three elements of the Fraud Triangle? With a better understanding of why fraud occurs, what can we do in our businesses to prevent it?

The Fraud Triangle needs to be the basis of any effective fraud-deterrence program and should address its three elements.

1. Pressure

While some employees steal due to financial pressure, they may also be stressed due to difficult circumstances at home or addiction issues. Remember the example of Amy that I wrote about last week, the office manager who embezzled $345,000 from her company over a four-year period. She began stealing because her son had been arrested and she used the money to hire a lawyer to defend him.

Other than paying employees fairly, there is not a lot a company can due to relieve many sources of pressure, financial or otherwise. But it can train managers to recognize employees that seem to be under unusual stress. In some cases the HR department can point them to resources to get help.

fraudhandcuffs2. Opportunity

This is the area where a business can be most effective and should focus its efforts. Every company needs to have an effective fraud prevention program with strong internal controls and management oversight.

Most employees steal only when they perceive no chance they will get caught. Remember, it’s only the people you trust that will steal from you. If you don’t trust them, you’ll make sure they don’t have the opportunity to steal. Trust no one implicitly.

For tips on preventing fraud, please see my previous columns, including “The High Cost of Fraud and How to Prevent It,” “My Number One Tip for Fraud Prevention” and “13 Fraud Prevention Tips.”

3. Rationalization

Like pressure, this element is harder for an employer to deal with as it is done internally and no one may know that the employee feels it’s okay to “borrow” the money from the company or is owed it because he is feeling overworked. Amy the office manager began working harder and longer hours to justify the money she was stealing from the company, telling herself that she was really earning it.

Rationalization lets a person continue to commit a crime while telling himself that he is really not a criminal; he is still an honest person. Make sure every employee knows that fraud will not be tolerated in your business and it will be prosecuted.

I also recommend you follow Lee’s Fraud Policy and post it in the employee manual and reinforce it verbally: If you steal, I’ll put your butt in jail!

Because it is more difficult for a company to deal with an employee feeling pressured and his ability to rationalize crime, the majority of efforts should be focused on the most effective way to prevent it in the first place — by not providing any opportunity for thieves to steal. That way, all your employees truly can remain honest.

3 thoughts on “Lessons from the Fraud Triangle

  1. Pingback: How They Got Caught | The Turnaround Authority

  2. Pingback: Stories of Unbelievable Fraud for Fraud Awareness Week | The Turnaround Authority

  3. Pingback: You Can Fight Fraud. And Win. – The Turnaround Authority

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