As we look toward 2016, we thought it might be useful to get a quick big picture on organizational fraud for context. We have been posting about the causal factors driving fraud and urging you to develop an effective risk-based prevention program. Now, here’s the why: 16 facts about fraud drawn from the 2014 ACFE Report to the Nations that should make it relevant to you. … Continue reading
Ordinary people can do extraordinary things, including committing fraud. The question is, what motivates an ordinary person to morph into a fraudster?
“Pressure,” or motivation, is one of the three causal factors of Donald Cressey’s Fraud Triangle, along with opportunity and rationalization. A quick summary of the theory is that a person commits fraud when under difficult or threatening personal circumstances (pressure) and he or she has access to a valuable target for personal gain (opportunity) that they can justify internally (rationalization).
The pressure factor in fraud risk is idiosyncratic and dynamic. Individuals’ circumstances are as highly varied as their perceptions and reactions are to them. The main thing is that the propensity for fraud emerges when a person’s circumstances create perceived pressure that leads him or her to exploit an opportunity when it appears. In other words, every person in every organization has the potential to commit fraud under the right combination of circumstances. … Continue reading
Donald Cressey’s Fraud Triangle historically has received a lot of attention during the ACFE’s Fraud Week and for good reason. It supplies a useful set of analytical distinctions in its three components—opportunity, rationalization, and pressure or motivation—that lead us to look at specific relevant factors that affect fraud in organizations. Understanding the causal forces at work helps us to take steps to address them.
The opportunity for fraud is the most straightforward causal factor for organizations to address because it is rooted in the organization itself. Unlike motivation or rationalization, opportunity does not depend on the potential fraudster’s personal circumstances or state of mind. Therefore, opportunity reduction works regardless of whether or not a potential fraudster exists in the workforce at any given time.
Opportunity has long played a part in the general policy of crime prevention. For example, in the 1980’s, a prominent theory was Crime Prevention through Environmental Design (CPTED). The aim was to create living and working spaces that removed opportunities for crime. In turn, CPTED was based on Jane Jacobs’ insight that safer cities were those that had vibrant, people-filled public spaces with lots of eyes on the scene. The idea that opportunity can be managed to reduce the incidence of crime, regardless of how potential criminals think or behave, has a solid pedigree. … Continue reading
As part of the annual fraud awareness week, we wanted to bring you a quick summary of the principles of fraud risk management. These points are based on an extensive review titled Managing the Business Risk of Fraud: A Practical Guide.
As the Practical Guide emphasizes, “An organization should strive for a structured as opposed to a haphazard approach.” The Guide is a good place to start developing a fraud prevention and detection program as part of your overall risk management efforts (or structuring a review of an existing program). But as always, diving into the details of organizing and implementing a program like this requires significant effort. Skipping steps or making assumptions about risks and mitigation practices without systematic assessment will often lead to gaps or weaknesses in the plan. … Continue reading
We recently received a call from a small business owner who had just discovered that a long time employee had been stealing from his business. The crafty scheme involved fictitious vendors and false invoices that resulted in checks being written to accounts belonging to the employee and his girlfriend. The thief (or thieves, as it turned out) was a trusted employee, of course, but rationalized taking the money so he could “support his family.” That is, support the family with luxury items, vacations, gadgets, and goodies.
This kind of fraud is distressingly common, despite that it is so hard to understand in the context of mature, cooperative behavior. We are simply programmed to learn to trust people that we share experiences and challenges with over a long period of time. We form teams.
Donald Cressey’s well-known “Fraud Triangle” identifies three elements needed to trigger a fraud: opportunity, motivation or pressure, or rationalization. It’s the rationalization that most often strikes us as removed from reality in some way, or transparently false. We feel a shock when someone trusted betrays us, and our first reaction is that they must feel the same way—how could they do this? … Continue reading