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Covering each corner of the Fraud Triangle

22 July 2020

External and internal threats in organizations are significantly growing. Such threats increase the risk of fraud and, at the same time, make it challenging for organizations to fight fraudulent activities. There is also a growing risk of the size and complexity of fraud. Some of the factors responsible for such growth include technological changes and the ease of moving, sharing, and exposing the organization’s assets.

One way of fighting fraud in an organization is to understand the reasons for its occurrence and how individuals engage in such activities. Most organizations are relying on the fraud triangle to establish the motivations for committing fraud and adopt better ways of reducing such incidences.

Read on to learn what the fraud triangle is and how to implement ways to reduce fraud risk in an organization.

What Is the Fraud Triangle?

The fraud triangle is a model that auditors use when explaining the reasons why a person may decide to commit a certain fraud. This framework comprises three elements that increase the risk of fraud. They include rationalization, incentive, and opportunity.

  • Rationalization

Rationalization is the validation that a person has to participate in a given fraud. The majority of people commit frauds on the basis of wrong treatment in the workplace, absence of other solutions, or even if the top management is involved in fraudulent activities.

  • Opportunity

Most frauds occur because the person committing them found accelerating circumstances. In your organization, employees may find an opportunity to commit fraud through weak internal controls, lack of commitment in enhancing proper ethics in the organization, and weak accounting measures.

  •  Incentive

Often, employees take part in fraudulent activities due to pressure. Workers in any organization may commit fraud to meet set targets so that they can get financial incentives. In other cases, analyst and investor expectations may pressure an individual to commit fraud. Personal incentives such as the need for more money, addiction, gambling, or the requirement to meet various bills may accelerate the risk of fraud.

5 Ways to Reduce Risk in an Organization

All sizes and types of organizations face the challenge of employee fraud. While you may want to believe that you have loyal employees, circumstances, incentives, and validation might push them to commit fraud. Employee fraud accounts for about 5% of the majority of organization’s revenue annually. Therefore, it is important to adopt robust measures to detect and prevent fraud in an organization.

Here are simple ways to help you reduce the risk of fraud in your organization.

Know Your Employees

You can tell your employee is likely to commit fraud from their behavior. You can detect a potential fraud if you observe and listen to your employees. One of the significant cues in an employee who has the intention of committing fraud is a change in their attitude. Such changes can, as well, point to internal aspects that you should address in your organization.

If some employees express a lack of appreciation, they are more likely to engage in fraudulent activity as revenge. Therefore, monitoring behavioral changes in your employees can help you not only identify intentions to commit fraud but also help you improve the organization.

Hold Frequent Proactive Discussions about Fraud

Some instances of fraud are attributable to diverse circumstances such as exposure to confidential company information to the wrong person. It is important to engage your employees in proactive discussions aimed at enlightening them about fraud.

Create awareness on the usage of company assets, technology, access, and sharing of company information. Ensure that there are frequent training and development sessions on ethical behavior and fraud. In addition, have a clearly-defined chain of command to deal with any risk of fraud in your organization.

Monitor Your Company Data

In the past, monitoring company data implied tracking transactions to identify any cases of anomalies and intention to commit fraud. Nowadays, an employee can commit fraud in various ways, such as sharing sensitive company data on social media, uploading such data to the cloud, or even emailing confidential information to external individuals.

It is important to safeguard your organization’s data to prevent employees from sharing it with outsiders maliciously. Adopt solutions that notify you promptly whenever any of the company’s data leaves the office or is shared online.

Build a Conducive Corporate Culture

Having a conducive working environment prevents theft and fraud instances. Building a clear corporate culture, writing distinct procedures and policies, and having conducive employment practices can help reduce the risk.

Another way to create a significant fraud prevention platform is to have an open-door policy. It allows employees to communicate freely with the management and solve issues that may pressurize employees to engage in fraudulent activities.

Normalize Internal Checks

It is vital to properly vet potential employees before they are offered insider information – particularly during a pandemic where many new hires will be brought in remotely.

There is a common practice among many firms that once the vetting process is complete that the job is done, but this can be a very dangerous practice. Our 2020 Strategic Intelligence Assessment shows that most internal fraud cases likely involve staff that have been employed between one and five years.

Fraud can happen in small and large organizations in different locations and industries. Whenever it happens, it can cost you huge monetary and resource losses, which makes it critical to have the right fraud detection and prevention measures in place. Therefore, focus on creating a conducive working environment and implement policies and solutions that lower the risk of committing fraud.


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