The Fraud Triangle is a combination of three factors – Opportunity, Pressure and Rationalization – that must be present in order for a fraud to occur.
In previous posts, David Anderson of David Anderson and Associates, a Certified Fraud Examiner offering forensic accounting services in Philadelphia, has mentioned that if at least one of the three factors can be eliminated, the potential for fraud and the need for a fraud investigation is either significantly reduced or goes away.
In this article, Anderson takes a closer look at the first leg of the triangle – Opportunity. In subsequent articles, he will examine the other two legs.
Businesses will install a set of policies and procedures as part of their fraud deterrence programs that are designed to protect systems and safeguard assets. These policies and procedures are often referred to as “internal controls”. If such internal controls are lacking, are poorly designed, or are easily overridden, it presents the potential fraudster with the opportunity to commit fraud.
“Let’s look at two common businesses situations,” said Anderson, who provides forensic accounting services in Philadelphia, “and how internal controls should be designed to prevent or significantly reduce the potential for fraud.”
The first, he said, is for handling payments made by customers. In a well-designed internal control system structured with fraud deterrence in mind, the person who opens the mail will be different from the person who prepares the deposit slip for the bank. Furthermore, neither of these people will actually make the bank deposit or record the receipt of funds and bank deposit in the company’s accounting system. In addition, the entire process would be overseen by a manager or supervisor. This step helps in fraud deterrence and lessens the need for a fraud investigation.
However, as this example indicates, these controls require that there be at least five different people involved. Many smaller businesses don’t have enough staff to separate these functions. As a result, some employees end up performing more than one of these functions. This creates an opportunity for the employee to commit fraud.
For example, the employee who opens the mail could also prepare the deposit slip and record the receipt of funds and bank deposit in the company’s accounting system. If that employee is trusted by the manager/supervisor, the manager/supervisor might not actively review the employee’s activities. This creates the opportunity for the employee to divert certain customer payments.
A second common business situation is for processing vendor invoices. In a well-designed internal control system, the person who sets up the vendor in the company’s accounting system is different from the person who approves the vendor invoice. Furthermore, neither of these people actually enter the invoice in the company’s accounting system, process the payment or sign the payment check.
As with the previous example, the entire process would be overseen by a manager or supervisor. If a company is unable to separate these duties, it creates an opportunity to commit fraud. If the employee who sets up vendor in the company’s accounting system can also enter vendor invoices and process payments, that employee would have the opportunity to create a phony vendor (or change the address of an actual vendor), process phony invoices and produce payments that the employee could divert for his/her own use.
Well-designed internal control systems help prevent the opportunity for the fraudster to commit fraud. This, in turn, “knocks out” one leg of the fraud triangle, thereby preventing or significantly reducing the potential for fraud.
If you require the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, litigation support, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.
