The Fraud Triangle
Posted on Wednesday, March 22, 2017 Share
In order to understand how to prevent and deter fraud from happening in your organization, first you must understand the elements of a fraud. For fraud to occur, there are typically three elements present: pressure/incentive, opportunity, and rationalization. Together they make up the fraud triangle.
Pressure or Incentive. Pressure provides a motivation to commit fraud. Pressure may be actually placed on management and/or employees or there may be perceived pressures being placed on them. For example, a nonprofit’s executive director may be told by the board of directors to achieve a certain level of fund raising by the end of the year (real pressure). The executive director also may believe that if he does not meet the board’s expectations, his employment will be terminated (perceived pressure).
Opportunity. A lack of personnel, or sufficiently qualified personnel, can result in the lack of controls or ineffective controls. This provides an opportunity for fraud to occur. For example, a nonprofit’s office manager is responsible for everything from answering the phones to writing checks to making deposits. In this instance, there is no oversight of the office manager which gives the office manager an opportunity to commit fraud.
Rationalization. Being able to rationalize a fraudulent act as being consistent with an individual’s personal code of ethics. For example, nonprofit employees are often paid less than their counterparts in the for-profit sector. Some nonprofit employees may rationalize the misappropriation of assets as compensation for their low wages.
No matter the size of the entity, a fraud normally follows a similar patter; an individual commits a fraud, receives benefits from the activity, and conceals the fraud. If the fraud goes undetected, the fraudster usually commits the fraud again and at a higher magnitude. In order to reduce the risk of fraud occurring, make sure your organization addresses each of the elements in the fraud triangle.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
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