Fraud deterrence is undoubtedly a complex issue. But there is one seemingly simple approach that can help you keep fraud out of your business or organization: Understanding “The Fraud Triangle” and using it to your advantage.
“‘The Fraud Triangle’ is what forensic accountants talk about when they refer to the three elements that are necessary for fraud to occur — pressure, opportunity and rationalization,” says David Anderson, a Certified Fraud Examiner and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley. “If those three elements are not in place, then fraud cannot occur. So it goes to reason that if you successfully eliminate one of the elements, fraud will not be a problem for you. It’s really a rather straightforward, proactive approach to fraud deterrence.”
Pressure, the first element, is the motivation or incentive to commit fraud, Anderson said. Pressure often comes from one’s personal life, such as the expensive illness of a loved one, a spouse’s unemployment, a gambling or drug problem, the practice of living beyond one’s means, or other situations that carry a heavy financial burden. In these cases, Anderson said, an employee may feel extreme pressure to find more money and that can open the door to fraud.
The second element, opportunity, indicates the ability of the employee to carry out the fraud through the misappropriation of cash or other company assets, Anderson explained. Opportunity arises when a company lacks critical anti-fraud controls, such as separation of duties, dual signature requirements for checks over a certain amount, management review of bank accounts and financial statements, and other necessary controls. Opportunity also can occur when excessive trust is placed in employees who have the ability to override or circumvent anti-fraud controls.
The third element, rationalization, refers to an employee’s justification for committing fraud, Anderson said. It can start as an employee’s simple rationalization that the theft is just a temporary loan that will be paid back before anyone ever finds out about it. But that type of thinking can quickly mushroom into grander rationalizations, such as “I’m underpaid and just getting my due.” or “My boss is stealing, so why can’t I?” or “They’re making a lot of money and won’t even miss what I have taken.”
“If you’ve got all three elements, you’ve got a potential fraud brewing,” Anderson said. “Remove one of the elements and the potential for fraud evaporates.”
Anderson recommends that you get to know your employees better so that you are more aware of any high-pressure financial situations they may be dealing with in their private lives. Prevent opportunity by enacting comprehensive anti-fraud controls and establishing a strong fraud deterrence program, he said. And send a clear message as a part of that fraud deterrence program that there is absolutely no acceptable rationalization for committing fraud, he added.
If have reason to believe that fraudulent activity has infiltrated your business — or if you believe “The Fraud Triangle” exists with any of your employees — Anderson recommends you act immediately by hiring a Certified Fraud Examiner from a firm that provides forensic accounting services in Philadelphia and the Delaware Valley. A comprehensive fraud investigation will determine the extent of your losses, if any, and an experienced Certified Fraud Examiner will identify weak spots in your internal anti-fraud controls and set up a strong fraud deterrence program.
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 firstname.lastname@example.org.
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.