Key Elements of Occupational Fraud. Fraud Triangle – motivation, opportunity, and rationalization.

November 3, 2009 by kutenk · 2 Comments
Filed under: Fraud 

5174-fullsize

Fraud Triangle

Three key elements are present in every internal fraud: motivation, opportunity, and rationalization. These three elements have become known as the “fraud triangle.




Motivation
The motivation component of fraud or embezzlement is the pressure or “need” that a person feels. It could be a true financial need, such as the need to replace belongings after a house fire. Other real needs may include financial distress from a lost job, high medical bills, child support payments, investment losses, or heavy personal debt.
The motivation could also be a perceived financial need, whereby a person strongly desires material goods but doesn’t have the money or means to acquire them. A person may also have an addiction such as gambling or drugs, and that could be a motivator. Nonfmancial pressures and motivators may be in play as well, and these could include such things as the expectation for good results at work, the imposition of unachievable goals, or the need to cover up a poorly performed job. Any pressure in one’s business or personal life could conceivably motivate someone to commit occupational fraud.




Opportunity
The opportunity to commit fraud includes the access to assets, people, information, and computer systems that enables the person not only to commit the fraud but to conceal it. Employees are given all sorts of access to assets and records in order to carry out their job duties, and that access is one of the key components of fraud. This is why it is so important to limit employees’ access to only the assets, systems, and information that are necessary for them to properly perform their jobs.
As corporate structures have become more complex and managers have become responsible for a wider range of employees and functions, individual employees have been given more access and control. Increased access to resources and data, along with increased control over functional areas of companies, has created a situation in which it may be easier than ever to commit occupational fraud. Obviously, these increased opportunities to commit fraud involve risk, but in many ways they are unavoidable in the modern business world.




Rationalization
The third and final piece of the fraud triangle is rationalization. This is the process by which an employee determines that the fraudulent behavior is “okay” in her or his mind. For those with deficient moral codes, the process of rationalization is easy. For those with higher moral standards, it may not be quite so easy; they may have to convince themselves that a fraud is okay by creating “excuses” in their minds. A thief may convince himself that his theft just makes up for the bonus or raise that he should have received but did not. An embezzler may tell herself that she is just “borrowing” money from the company and that she will eventually pay it back. Maybe the rationalization is that no one will “miss” the funds or assets, or that the company “deserves” the theft because of lax supervision and security.
Management has the most control over the opportunity portion of the fraud triangle. It can limit access to assets and put controls in place that ensure monitoring of systems and people. Motivation can be constrained by management as well, although not to the degree that opportunity can be limited. The best way to reduce “needs” is by paying employees fairly (to reduce perceived financial burdens) and by creating performance systems that are reasonable (not requiring job performance beyond what is realistic).
Rationalization is probably the most dangerous piece of the fraud triangle because it is the one that companies have the least control over. It is nearly impossible for management to eliminate the rationalization piece because they can’t control the minds of employees. Management has no way of knowing what lies an employee may tell himself in order to justify fraud in his mind, so there is virtually no way of counteracting the lies.

  • Share/Bookmark

Tags: , , , , , , ,

5 Legal Elements of Fraud. How Fraud investigators look for evidence of intent to defraud.

September 4, 2009 by kutenk · Leave a Comment
Filed under: Fraud 

Legal Elements of Fraud:
    Intentional
    False
    Representation
    Material point
    Victim suffers harm




It is not always so easy to prove intent. One of the first defenses that often surfaces in a fraud case is that the perpetrator simply made a mistake or error and there was no intent to defraud. In some situations, that may truly be the case. Plenty of errors are made daily in business, so that defense can’t immediately be ruled out.

Fraud investigators, therefore, look for evidence of intent to defraud in the documents and actions of the accused. Manipulation of documents and evidence is often indicative of such intent. Innocent parties don’t normally alter documents and conceal or destroy evidence. Although there may be times when these actions are taken to cover up a mistake due to fear of discipline, these things are usually perpetrated by those who had an active part in the fraud and its cover-up.




Obstruction of an investigation can also signal criminal intent on the part of a participant in a fraud scheme. Innocent parties don’t usually lie or conceal information when being questioned relative to an occupational fraud. Naturally, employees are sometimes nervous or hesitant about providing information and evidence when fraud is being investigated. They may be reluctant to participate in an interview because of the fear of implicating others in the fraud. But again, innocent parties are, for the most part, not inclined to cover up evidence or lie about the situation. Therefore, false statements and other obstruction of an investigation can be another factor that points to the intent to defraud.

Finally, two additional factors to consider when determining the intent of an involved party are past behavior and the benefits obtained from the fraud. Employees, managers, and executives who have a prior history of engaging in unacceptable behavior or being involved in inappropriate transactions should be eyed carefully Although past behavior doesn’t prove fraud in a current investigation, a pattern of unethical behavior certainly indicates something about the character and tendencies of the accused.

It is important to determine whether an individual obtained any benefits from a suspected fraud. Typically, errors are exactly that— errors that don’t personally benefit the person responsible. However, a transaction that creates a direct or indirect benefit for the person involved should be viewed as suspicious. Fraud is meant to give illegitimate benefits to the parties involved, and those benefits may be indicators of a participant’s intent to defraud.



None of these factors alone can prove intent to defraud beyond all doubt. In the absence of a confession from the accused, intent may need to be established by compiling a list of behaviors that signal the intent. The more factors identified in the commission of a fraud, the closer we come to proving that a fraudster intended to commit the crime.

  • Share/Bookmark

Tags: , , , , , , , , ,