The following three factors are commonly referred to as the “Fraud Triangle.” While the first two factors typically cannot be regulated by an organization, the last factor is internal, and can be controlled by an organization.
- Pressure/Motivation – Management or other employees have an incentive or are under pressure, which provides a reason to commit fraud.
- Rationalization – Those involved with fraud are able to rationalize committing a fraudulent act. Some individuals possess an attitude, character or set of ethical values that allow them to knowingly and intentionally commit a dishonest act.
- Opportunity – Circumstances (e.g., the absence of controls, ineffective controls, or the ability of management to override controls) may be present that provide an opportunity for a fraud to be perpetrated.
In a recent investigation, an employee was committing fraud by misappropriating assets of the company. Although it is unclear at this point what the employee’s motivation was, or how the decision to commit fraud was rationalized, it is clear that the opportunity for fraud was present at the organization: the employee had check-signing authority and access to all accounting records, bank accounts and company credit cards. There was virtually no segregation of duties within the accounting function, which is a very dangerous combination when it comes to fraud risk.
In order to limit the chances of fraud, it is important to remember certain ideas:
- Check preparation and check-signing authority should not be given to the same individual;
- Bank reconciliations should be prepared each month by an individual that does not have authority to use the account; and
- A yearly financial statement audit is a good tool to help prevent fraud.
No matter what the level of trust is with your employees, it is important to keep internal controls in place at your organization to prevent fraud and run a healthy business.
For more information, please contact Joel Rosenthal at 412.697.5387 or Tom Claassen at 412.697-5330.
Schneider Downs provides accounting, tax, wealth management, technology and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA and Columbus, OH.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.