The Fraud Triangle.

The Fraud Triangle

Most people who commit fraud at work are trusted individuals who are first-time offenders with no criminal history. According to the famed criminologist Donald Cressey, there are three factors that must be present at the same time in order for an ordinary person to commit fraud. They are Pressure, Rationalization, and Opportunity. Together, these factors are known as the Fraud Triangle, which is a framework for spotting fraudulent activities. 

  • Pressure is what motivates the fraud in the first place. The individual may have financial problems, addictions like gambling, shopping or drugs, or pressure to show good performance or results.

  • Rationalization is when an individual thinks they are justified because they are underpaid, or it’s for their family, or they need it now but they’ll pay it back before anyone notices. The individual justifies the crime in a way that makes it an acceptable or justifiable act.

  • Opportunity is created when there are weaknesses in controls. Individuals think they won’t get caught because nobody is reviewing their work.

Fraud Prevention and Deterrence

Combatting fraud before it occurs is vital to successful business operations. All employees share the responsibility for preventing, deterring, detecting, and reporting questionable activities and potentially fraudulent transactions. Fraud deterrence involves eliminating factors that may cause fraud. Of the three elements of the Fraud Triangle, opportunity is the one that we have the most control over. Our fraud deterrence efforts should focus on reducing the opportunity to commit fraud. 

Strong internal controls are the foundation of fraud prevention and deterrence. A strong control environment can deter fraud by eliminating the perception of the opportunity for fraud. Elements of a strong control environment include:

  • A culture of honesty and integrity

  • A positive workplace environment

  • Training employees on UC’s values and code of ethics

  • Oversight of activities by management

Even in the strongest control environment, internal controls can only provide reasonable assurance, not absolute assurance, that our objectives will be achieved. Because internal control is a process effected by people, breakdowns in the control structure may occur. Management awareness of risks to the control environment and mitigation of these risks is important to the overall success of the internal control system and to the success of our objectives – ultimately, our mission of teaching, research, and public service. The biggest risks to the control environment include:

  • Management Override of Controls: A well-designed control system, if set aside by management’s discretion, can be equivalent to no control in terms of risk

  • Access to Assets: The best way to safeguard assets is to control access to them

  • Substance Over Form: Controls may appear to be well-designed, but they may still lack substance

  • Conflicts of Interest: When an employee’s loyalties are divided, there is a distinct risk that the employee may choose a course of action detrimental to the organization

  • Failure to Anticipate Risks: Management may fail to anticipate certain risks, and thus fail to design and implement appropriate controls

  • Collusion: Two or more employees may agree to circumvent internal controls

  • Lack of Policies and Training: Employees need formal guidance on code of conduct, conflicts of interest, and appropriate ethical behavior

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