Fraud is committed by real people. They have real families and real jobs. They often are just like you and me. But what makes thieves different from a lot of us is their ability to lie and steal. Most of us would never seriously consider taking something that does not belong to us, especially not significant sums of money.
But thieves are different. Those who commit fraud have taken that which is not theirs. They have cheated others. They have covered up their lies. What makes it okay in their minds to commit fraud? What is it about their moral code that allows them to steal? How do they justify their actions?
The answer is found in the fraud triangle, an old concept in criminology that still has wide acceptance in the fraud examination field. In order for fraud to occur, three things must be present, and each represents one side of the triangle. The three pieces of every fraud puzzle are opportunity, motivation, and rationalization. These are key to explaining why a fraud occurs.
First, there must be an opportunity. That includes an opportunity to steal something of value, as well as to conceal the theft. An employee generally won’t endeavor to take a company’s assets if several people are observing. Rather, the theft will occur away from watching eyes, when there is a chance to sneak off with the assets.
The primary type of opportunity in a company that allows a thief to run off with data and assets is typically a weakness in the system. Poor controls can lead to theft. While we can’t watch all employees all the time, and some frauds will occur just because we’re not watching, there are others that occur because a company has bad control procedures in place.
For example, a company may have a weakness in a system that allows someone to write a check to a phony vendor. Creating fictitious sales and supporting documentation, in a manner which fools the auditors, also demonstrates an opportunity for fraud.
There can be many different opportunities in companies, from lax security to lack of authorization controls to computer systems that don’t restrict access via passwords. If you sat down and thought about your company or a client’s company, you could probably come up with a lengthy list of fraud opportunities.
Effectively preventing fraud means that companies must have policies and procedures in place to take away the opportunities to commit fraud. This includes security of both the physical type (locked doors, security cameras, employee badges) and the digital type (passwords, Internet firewalls, encrypted data).
In addition to security, companies must have policies which define ethical behavior and outline consequences for violation of the policies. A company must also have management and executives who are committed to leading by example while enforcing the policies and procedures.
The second piece of the fraud triangle is the motive. What has caused the employee to steal? This could be a financial need like a potential mortgage foreclosure on the employee’s home or a spending spree that went out of control. Gambling habits and drug addictions are common motives for theft.
Sometimes employees are motivated by a feeling of inequity or a perception that they are underpaid. Revenge against an employee or against the company as a whole can motivate an otherwise honest employee. Many times greed can be involved in the motive to commit fraud.
Motivation is difficult to deal with because it is often completely internalized. Management may not be aware that an employee has a risk factor such as high debts, or that the employee feels unfairly treated. On the other hand, when management does see warning signs, such as the employee, who often complains about disparities on the job, these should be taken seriously.
Companies can help reduce the motivation for fraud by ensuring that they are paying employees market rates for the jobs they do. Management must also strive to treat employees equally and fairly, to the extent that is possible. They should also be on the lookout for warning signs that might indicate a personal motivation, such as financial problems, legal problems, or addiction problems.
The final piece of the fraud triangle is rationalization, which deals directly with a thief’s personal moral code. People are generally honest and tend to want to behave ethically. In order to commit fraud, a person has to convince herself or himself that it is “okay.” She or he must rationalize and justify the behavior under her or his own moral code.
Feeling that the company “deserves” to be stolen from is a common rationalization, in addition to the idea that the company won’t really be affected by a small theft. Other examples could include “I need it more than they do,” or “I’m just borrowing the money.”
Rationalization is very difficult for management to deal with, because it is impossible to get into someone’s head and determine when theft will be “okay” and when it will not. For that reason, companies are best off not focusing on this factor when attempting to reduce opportunities for employee fraud.
Eliminating the Triangle
Understanding these basic components of fraud is important in preventing and detecting fraud. So much fraud in the real world is based upon the mindset of the person doing the stealing, so an understanding of how the three factors — opportunity, motivation, and rationalization — come together is key.
When trying to eliminate fraud opportunities at a company, put yourself in the shoes of a would-be thief for a minute. What might cause you to steal from the company? Is there an oppressive manager who creates ill-will among employees? Is there an immediate need for money that might drive you to commit fraud? Is there a total lack of supervision of critical processes surrounding money?
Employees must be made aware that their activities are being monitored and corrective action will be taken. Using procedures like surprise audits and random checkups will help keep them on their toes. If employees perceive that management is not really keeping an eye on them or the money, a golden opportunity for fraud is before them.
Companies must first focus on reducing opportunities through better security, procedures, and supervision. The next step is working toward a fair and amicable workplace that doesn’t give anyone a “reason” to harm the company. Finally, companies must also take action against those who commit fraud. Punishment sends a message that bad behavior is not accepted or tolerated.