One of major risks that every growing business suffers from is creating circumstances for fraud to occur. Due to lack of experience in running big teams, there is high tendency for owners/managers to lose control such as lack of proper segregation of duties, high reliance on few people, extreme cost cutting.

The impacts of such lose control many times end up resulting in huge amount of capital loss, reputation loss etc. and can sometime lead to close down of business. It is extremely important for business owners to be aware of possibilities of fraud that may occur and create adequate controls to cover for it

Let’s look at fraud Triangle below,

growing business risks fraud triangle

For embezzlement to occur 3 elements must exist:

• ●
• Pressure (Motive)

• ●
• Opportunity (Access)

• ●
• Rationalization (Justification)

If one or more can be controlled, the occurrence of fraud can be controlled and the risk can be mitigated. If all three are allowed to occur, your organization is ripe for a fraud.

Let’s use a simple example with these facts that we will expand as we go:

Mr. Simple is the warehouse incharge at a warehouse, has been employed there 10 years and is trusted by the owner. He has a team of 8 people working under him who follow his instruction. Mr. Greedy receives orders from walk in customers, responsible to collect cash from customers, responsible for releasing goods, responsible for physical count of inventory at warehouse , depositing cash with the finance team.

We can clearly see above that Mr.Simple is carrying multiple tasks and has all the control to show or to hide information and thus can very much establish a `Manipulation Engine` or `Opportunity side of the triangle`. It does not mean that every person who has the capacity to run a Manipulation Engine, actually does that but circumstances change with time.

We have established that Mr. Simple clearly has the opportunity (access) needed to embezzle, so we have one of three sides of the triangle. But Mr. Simple lives within his means, is treated fairly at work and really has no reason to steal the money—so all looks good and in control right?

Meanwhile … we learn that this year none of the employees received any bonus/increments, which is disappointing even when the business over all is doing well. He sees the owner buying new car/house while not giving any increase or bonus to people working in the Company and he believes that his performance has been a major reason for the Company to do well.

Now we can where this is headed, right? Getting no bonus or no salary increase, coupled with the owner displaying high wealth leads Mr.Simple to believe that he has been working so hard for the Company and when Company does well, all revenue amount is paid to owner while him receiving nothing . Yes, we now have a second side to the fraud triangle: the rationalization (justification) of stealing.

Now let’s imagine that there a marriage in the house of Mr. Simple and he requires money to pay the suppliers. The only easy way to get that is through the Manipulative Engine. So, in order to solve his problem he plans it very well and thus keep some of the collection from warehouse sales with him for meeting marriage related personal requirements and then planned to pay back later out of his salary in next 6 months. Yes, we now are looking at third side of fraud triangle: the pressure.

However, in reality money is always a scarce resource, so taking money out of salary to pay back never happens which indulges Mr.Simple to cover up the small frauds done. This cycle takes speed with knowing that nobody catches and nothing happens until it leave a big hole in company cash flows. So when you hear someone saying that company is making profits, collecting money but still have no cash flows, then it is a time to check if a Manipulative Engine is on somewhere in that company.

The circumstances above can happen in any chronological order, yet still come together for the ultimate perfect storm. The pressure and rationalization may have existed first, but the opportunity came later and Mr. Simple then acted upon it. Or maybe the rationalization came last after Mr. Simple was passed over for the promotion and pay raise he felt that he deserved more than anyone else at the store.

So which sides in the Fraud Triangle are “controllable”?

● Pressure
Pressure is definitely the hardest to minimize, let alone prevent. Pressure can be many reasons such as low salary, emergency at home, adopting luxurious lifestyle etc. You certainly cannot control (or even be aware of) everything happening in peoples’ lives. There is not a great deal you can do, apart from promoting an ‘open door policy’ and letting your people know that they can come to you for help or advice when they experience hardships.

Also companies must keep an eye on changing habits/personal circumstances such as getting married, urgency and make a review on regular basis if salary paid is enough for people to survive

● Rationalization
You can attempt to control rationalization, but will be successful to only a certain extent. You can treat your employees fairly and offer the highest pay in the industry, but what you can’t do is please all of the people all of the time. You can try to reduce the rationalization side of the triangle, but likely will not be able to eliminate it.

● Opportunity
That leaves us with opportunity. You can control opportunity and the access to assets (i.e., money, inventory, supplies). Practices that work best in such cases are as below,

● Proper internal controls such as review segregation of duties

● Cash/bank processes

● Compulsory leave policy for employees and have the work counter checked on a regular basis.

● Whistle blower policy and keep a line of direct access to the owner.

● Having an independent internal auditor checks the work on a random basis and identifies such risks in the Company and help control it.

Being aware of the circumstances that allow fraud to occur and prosper—and knowing which areas can be mitigated through management involvement and heightened internal controls—will give you an edge in combating such incidents within your organization.

According to the 2014 Report to the Nations on Occupational Fraud & Abuse, the typical organization loses 5 percent of its revenues to fraud each year. At its extreme, fraud can destroy entire companies — Enron, Arthur Anderson and WorldCom are just a few examples, making the identification and management of fraud risks crucial components of your organization’s business plan.