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Fraud 101 – The Real Cost of Doing Business

Whether your company is a business or a non-profit organization, if it has been around for 200 years or 2 days, there is a threat to your organization that the majority of owners, CEO’s and board members are reluctant to confront.

In reality, this threat has made the headlines repeatedly, whether you’re in Bangor, Maine or Seattle, Washington, the stories are hauntingly similar. At times it can bankrupt an organization, other times it cripples them, destroying lives and the livelihood of the employees, owners and their families. What could be so devastating and yet so misunderstood? That one word which escapes a label on a balance sheet and is not identified on a profit and loss statement is “Fraud”.

Think back over the past couple of months. How often did you read or hear the word “Embezzlement” (which is a type of fraud) in the local news? I am willing to bet that it’s popped up several times. As a mini, non scientific experiment, pay attention to the news for the next few weeks, chances are you will be shocked at the organizations that are victimized.

Magnifying glass dollar signYou may be shocked, but that is nothing compared to how shocked the victimized organization was. Right up until the scheme came to light the organization had no clue that they were being taken advantage of. Read the quotes of the business owner or Executive Director, many go something like they “never thought it could happen to them” or “She (or he) has been with us for years.”

Unfortunately, it is this very thought process that allows an organization to fall prey to employee fraud.

Now that we’ve established that it does happen, especially to those companies who are positive that it couldn’t happen to them, let’s jump right into why it happens. For this we will need to understand something called the fraud triangle.

The fraud triangle was model developed by criminologist, Dr. Donald Cressey. He indicated that three separate factors needed to be present in order for an ordinary person to commit fraud:

  • Pressure
  • Opportunity
  • Rationalization

Let’s take a quick look at each one of these factors to see how it applies to the typical fraudster.

Pressure – Sure we all have some form of it, but this pressure is actually the motivator. This is the point whereby the feeling of no way out, for example a financial situation due to family illness, addiction or divorce.

Opportunity – Pay attention to this one. Of the three sides to this triangle this is the one an organization may have the most control over. Why? Because it enables a person to feel they can use their trusted position within the organization along with poor internal controls to commit the fraud with very little risk of being caught.

Rationalization – This is where desperate people sometimes do desperate things. In order to commit the fraud an ordinary person needs to reason with their conscience. Often, the person believes they are only borrowing the funds, fully intending to pay them back. Perhaps they are dealing with an ill child or parent and they see no other way out. Feeling that they are underpaid or underappreciated and basically owed the money is another example of rationalization.

By now I hope you are starting to realize that under the right (or wrong) circumstances it is easy to see how some people begin their walk down a very slippery slope. But of course, it couldn’t happen in your organization, right?

Join me in the near future when we will take a walk deeper into the world of fraud and provide insight into various fraud schemes, how they are accomplished and the best ways to prevent them.

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