Using the Fraud Triangle to Prevent Employee Theft

A recent article in the Austin Business Journal titled “Fighting Fraud” got me thinking. What can small businesses do to reduce fraud in the workplace?

The Association of Certified Fraud Examiners estimates that fraud costs U.S. companies nearly 7 percent of gross revenues annually, or $994 billion in 2008. Often, fraud and theft go unreported because employers are too embarrassed to have it publicly known. Regardless of whether fraud becomes public knowledge, its effects can be devastating.

As an employee of an accounting firm, I am constantly made aware of the many threats that can face a small business. Employees can wear many “hats”, and combination of duties can allow for fraud. For example, someone who has access to business checks and authorization to sign those checks can be tempted to use those funds improperly. Small business owners should become familiar with the “fraud triangle”:

Pressure, opportunity, and rationalization are the three key elements present when committing fraud. Pressure is what makes an individual commit fraud. It generally stems from financial issues such as outstanding debt, expensive tastes, or addiction issues. Opportunity is the ability to commit fraud. Opportunity arises through weak internal controls, inadequate oversight, or a high management position with plenty of freedom. Rationalization, the third element, is a crucial aspect in committing fraud and occurs because individuals feel the need to justify their actions. Examples of rationalization include thoughts such as “I deserve to be paid this much”, “I’m just borrowing the money”, or “My family will starve if I don’t take it”.

Employers should be aware of behavioral “red flags” that employees display that may indicate potential fraud:
· Overassertive or controlling
· Smooth talking
· Intense desire for personal gain
· Living beyond their means
· Working excessive overtime
· Not taking vacations or sick leave
· Not comfortable with people reviewing their work

Keep in mind that displaying just one or two of these characteristics may not be suggestive of fraud. However, combining several of these traits with the presence of elements of the fraud triangle can be a tell-tale sign of impending theft.

--LeAnn Carlson