Criminologist Donald R. Cressey identified three traits that are commonly present when people perpetrate fraud. Cressey created an hypothesis known as the ‘fraud triangle.’ The three sides of the fraud triangle are:
1. Rationalization – Since the majority of individuals who commit serious occupation fraud are not career criminals, they feel a strong need to justify their actions.
2. Opportunity – Access to company assets and a lack of internal controls that will prevent immediate detection of the fraud.
3. Pressure – This is a financial need (real or perceived) that the individual cannot share with others due to potential shame or loss of social status.
When these three sides of the triangle are present, there is a much higher than normal chance of an individual committing a fraud. In this post, I want to write more about one of the three sides of the fraud triangle, opportunity. Opportunity exists when an individual has access to assets and the ability to misappropriate them with little chance of being immediately detected.
There are two sets of conditions which often exist simultaneously to create opportunity for fraudsters. The first condition is that of the “trusted employee.” I have never worked on a fraud case when, after the fraud is detected, an owner says, “Yep. I figured they had been stealing from me for the past three or four years.” Never happens. The owner or manager is always dumbfounded to learn that the culprit who has been committing fraud is one of the most trusted, if not beloved, employees. This type of blind trust, with little or no oversight, creates big opportunities.
The second set of conditions is created by the current business climate. In the current economy, people are often asked to do more work, as their coworkers are laid off. In some cases, this reduction in workforce causes previous safeguards to be eliminated. There is less segregation of duties and no new mechanisms are put in place to offset the loss of personnel. This loss of internal controls creates opportunity for frauds to be committed more easily and to increase the time before they are uncovered.
All business owners want to trust their employees, especially those who handle the money and assets of the company. However, business managers would be well served to follow the quote often used by President Ronald Regan, “Trust but verify.” Trust is good, blind trust is bad. Managers should regularly work with an expert in fraud deterrence to review policies and procedures to make sure they are updated to reflect current staffing capabilities.
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