Fraud has been an increasing problem within businesses over the past few years. A strong reason for this is the poor economy. Do you know how safe is your business from fraud, especially from employees? In order for fraud to occur, three elements have to be present. These three elements together are known as the fraud triangle.
Pressure: Pressure is the aspect of what causes the employee to commit fraud. This may be pressure from having to pay bills, drug or alcohol problems, or simply living beyond one’s means.
Opportunity: How easy is it for an employee to commit fraud? Does the employee believe they will not get caught? Weak internal controls, poor management oversight, and poor separation of duties are key factors on the opportunity employees have on committing a fraudulent act.
Rationalization: The last element of the fraud triangle is rationalization, meaning the person can justify their actions. They may believe that they have to commit the fraud in order to pay for their mortgage, gambling problem, or for mounting family medical bills. Many times, the individual views the fraud as “borrowing” and believes they will pay it back in the future; which seldom happens.
So how susceptible is your business to employee fraud? All three of the elements of the fraud triangle have to be present in order for fraud to occur. A simple action step to take would be to mitigate one of the elements. As accountants and auditors, we stress the aspect of opportunity and mitigating this by having strong internal controls and separation of duties. But, as a business owner, if one can mitigate the opportunity or rationalization elements, this will aide in deterring employees from committing a fraudulent act as well.
By: Ryan E. Leininger, CPA
