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Are you familiar with the fraud triangle?

If you are a business owner, accounting fraud may not be something you think about every day. The company is doing well and you feel you have trustworthy employees, so there is nothing to worry about. However, even companies with just a handful of employees can fall prey to an unscrupulous thief whom you would never suspect of wrongdoing.

Whether you own a small business or are the CEO of a large corporation, you should be familiar with the components of the “fraud triangle” and keep these elements in the back of your mind.

Fraud comes in threes

There are three components to the fraud triangle:

  • Pressure: An employee, such as a bookkeeper or CFO, who is able to access the company resources, might be tempted to engage in accounting fraud because of the pressure caused by personal issues, such as heavy credit card debt, a gambling habit or a divorce.
  • Opportunity: The employee must see a way to steal company funds without getting caught. It could be as simple as having access to an unlocked cash drawer, or something more sophisticated, such as discovering a weakness in the accounts receivable system to exploit.
  • Rationalization: If an opportunity to misappropriate company funds presents itself, and the employee is under sufficient pressure to take that chance, he or she will figure out how to justify the crime.

To be successful, fraudulent activity requires the involvement of all three elements.

Pressure from within the company

The person who ultimately engages in defrauding the company may also be under a great deal of pressure from a superior. For example, the CEO of a publicly held company is always focused on making the quarterly sales numbers to satisfy the expectations of Wall Street. The CEO may lean heavily on the CFO to do anything necessary to make sure the company earnings compare favorably with the projections that have been given to the media. Accounting fraud could easily follow.

Situational awareness

Remember that the fraudulent act itself can happen quite suddenly. Be aware of an employee who works long hours and never takes a vacation, one whose lifestyle has become more flamboyant and upscale or one who is stressed over personal financial woes. If you keep your eyes and ears open, you will be in a better position to recognize someone who might be about to put the fraud triangle to work.

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