(Final in a 3-part series)
In the first part of our series, we dealt with popular occupational fraud schemes. In Fraud 201 we discussed who commits occupational fraud. This article delves into why employees may commit fraud and offers some suggestions on what you can do to keep it from happening.
Dr. Donald R. Cressey, a criminologist whose research focused on embezzlers, developed the following hypothesis:
“Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-sharable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply their own conduct in that situation, verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.”
This hypothesis is the foundation for Cressey’s “Fraud Triangle,” a model for explaining the factors that cause someone to commit occupational fraud. The factors are Pressure, Opportunity and Rationalization. The existence of these three factors together can lead to fraudulent behavior.
Pressure is an incentive or reason for doing something. Pressure can be internal or external to the company. Internal pressures include perceived lack of appreciation, the perception of being under-compensated, being mistreated by a supervisor/boss/owner, etc. External pressures include addictions, unexpected financial difficulty, health concerns, family financial pressures, etc. In the context of occupational fraud, the pressure ultimately causes a financial problem for the employee. Thus they are forced to look for ways to solve their personal financial issue.
Identifying pressures is often a difficult task and one that may not provide a benefit in excess of the cost when trying to deter fraud. Keep in mind, however, that many convicted perpetrators were living beyond their means. So having knowledge about your employees’ activities outside of you business can prove to be a valuable fraud prevention technique.
Opportunity is any chance for advancement. Opportunities exist for employees when they have both access to an asset and access to the company records regarding that asset. For instance, when an employee has both the ability to authorize and record a cash disbursement.
Opportunities can be minimized with well-designed internal controls. Therefore, a review of your company’s processes, combined with periodic oversight and inquiry, will help in identifying opportunities and ways to eliminate them. Segregation of duties and authorization, along with avoiding conflicts of interest, are also strong preventive tools.
Rationalization is often considered the trigger for fraud to occur. Rationalization is the justification of the fraud as the solution to the pressure. In general, most people are good and want to do good things. Therefore rationalization is necessary in order for the good person to allow the pressure to coerce them into doing a bad thing.
The existence of all three fraud triangle factors in a particular instance causes the chances of fraud to skyrocket. Don’t get caught holding the triangle — know your critical employees, design and implement effective internal controls and watch for changes in employees attitudes, habits and activities.
If you are concerned about occupational fraud in your organization, call Jason Thompson at (317) 608-6694 or email [email protected] we would be happy to discuss how we could be of assistance and ideas for prevention that you can take advantage of.