What is a Fraud Triangle?

Tuesday May 4, 2021 comments Tags: nonprofit, accounting, fraud

Any accounting business and tax advice contained in this podcast is not intended as a thorough in depth analysis of specific issues. Nor is it a substitute for format information. Nor is it sufficient to avoid tax related penalties. If you have specific questions that you need advice for, be sure to schedule a strategy session and not solely rely on information in this podcast. All right, back to the episode. 

Hey, it's Chyla Graham, you're listening to another episode of The Nonprofit Ace Podcast. This season I'm all about helping people be more preventive, more proactive when it comes to fraud. And so today, let me share a little thing called the fraud triangle. A fraud triangle are the three things that need to be in place in order for fraud to occur. So typically, if one of these is missing, fraud will not occur. Not that never, there's no Nevers, but the likelihood is less. So think about these three things. 

First, is the opportunity. This is the number one thing, if people have the opportunity to commit fraud, then it's possible. So the opportunity looks like: there's no segregation of duties, there's no internal controls. If you haven't heard the last few episodes, check those out. So internal controls, there's something stopping them, they can’t just do it on their own. Do they have access to cash? Okay, there's the opportunity. But are there now some internal controls? Is there someone who's going to check to say, so I looked at those receipts, and we're missing cash. 

There's an internal control that's going to prevent that opportunity from manifesting. There is too much trust. So that might feel weird to say, like, Oh, this is how fraud occurs. But it is, it is exactly how fraud occurs, when you trust one person to do the right thing. You say, Oh, they would never. Would they? Would they never? Are you sure? You don't know. And so if you've put all your eggs in that basket to say, you know what, they love our organization so much, they would never do anything to harm us. They love you right now.

And things change, things happen. Things like pressure. So that's the other elements of the fraud triangle. So there's pressure or motivation. So think about what's happening internally as well as externally. So you want to think about, is this person in debt? Is this person living, “above their means”? This one is tricky, because you don't want to count someone's money for them. But think about it. If you're like, wow, I don't know how they're doing it. You don't need to, like that's not your place. But consider does this person also have the opportunity to commit fraud? And so should you be alert? 

So one case is, if you have not checked out the Queen's horses, there is a documentary on Netflix, I love it, because there's a black woman CPA in it. And so I'm like, Listen, listen to her, but are their lifestyle outpacing what you know that they make, just in theory, you don't need to know the actual numbers, but this one was buying horses. They knew this, you know, buying horses based off of how much you make here. And so they rationalize, like, Oh, she must have like money. 

She didn't have money, she was stealing their money. So think about like, is this person doing a thing that you would say is above their means based off of your knowledge of maybe not their home life? But their current work situation? Does it make sense? Think about lifestyle pressures, there's the idea of, they got to put kids through school, they got to pay for their car, they have sickness, you're not providing health insurance. These are things that are happening that could incentivize someone to commit fraud. 

There's also the internal thing. So those external like, I got bills to pay, there's also the internal pressure of I have to do a good job. So it's important to note that fraud is not always about someone stealing money, it could be the misrepresentation of things. This I have seen happen. So I've seen where someone was so overworked, they had an internal pressure that I have to finish my job, I have to provide these reports. Rather than saying I need more time, they just changed the numbers on the finance when they said this is what I think it should look like, this looks reasonable. That is fraud. 

So think about does this person have enough time to do their work accurately? Is there pressure for them to perform? Is there not just the pressure of Oh, I need to finish my work is there also the pressure of if we don't hit these numbers, we are going to lose funding. If there's that pressure, there's the incentive that they might mess with the numbers to make them look better than they should. So think about those, I kind of think of that as an external pressure. But anyway, think through that, are we creating an environment where people must perform, where they have to get all these things done and it’s not reasonable? Also, as their personal life, is there some factors there that are causing it, making it likely that they will be like I need to tap into this. 

And then there's the rationalization. So that comes on the backs of that lifestyle. Do you hear people say, you know what, they don't pay me enough for this. Hi, you might have someone at your organization who could feel like, I deserve to get more money. I'm not being paid what I'm worth. This is one of the reasons I advocate for paying your staff. You have to pay them appropriately, because you don't want people to say you're not paying me enough money and therefore I will steal your money. 

One of my favorite podcasts is the scam by this podcast. I like financial crimes, I think they're very interesting. And one of the things that she talked about with one guest was on the, we have teenagers are working as managers at jobs for minimum wage. And they said, they're like, if you're paying me minimum wage, I'm stealing something. If you're paying me $7 an hour, I'm stealing something. And it's true. 

The likelihood, the pressure, because I have bills to pay increases the likelihood that something will be stolen. Not that it will. But it could be. It increases the pressure and increases the rationalization that I deserve, that I need. They don't pay me enough. So at your organization, take the time to think through where there are opportunities for people to commit fraud. So this is we lack internal controls, they're not segregation of duties, we have too much trust in a specific person. Also consider where there is pressure. 

So we have an individual whose lifestyle is adding pressure, there's family obligations, they have things going on that could cause them to have pressure, as well as what we're seeing at the organization. Are we loading work onto them? Are we telling them they must perform or they are telling people that if you don't do this thing, or if we don't show these numbers, this will lead to our destruction, our organization is going to fall apart if these numbers don't look good. And then finally, are people rationalizing? Are people saying we don't get paid enough to do this? 

They're overworked and underpaid is what we used to like to say also think about people who talk about, Oh, can I borrow this for a little bit? That could be someone who intends to pay back. But do they get around to it? So think through that, that's your homework, it can be daunting, do not think of fraud, and the preparation of preventing yourself. 

The preparation, it takes into like doing this assessment, don't think about this from a lot of organizations would never work our employees wouldn't ever you want to think of it from we want to protect the organization and we want to protect the reputation of our employees. So it's not just about protecting yourself. You want to say we do trust these people and we want to protect them. We don't want to put them in a situation that could cause issues later. All right, then. Thanks for listening to another episode of The Nonprofit Ace podcast.

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