Fraud risk is sadly something we all need to be aware of. A 2014 Global Fraud Study conducted by the Association of Certified Fraud Examiners (ACFE) estimates that the average business loses five per cent of its revenues to fraud. The global total of fraud losses is $3.7 trillion. The median fraud case goes 18 months before detection, resulting in a $145,000 loss. How can you avoid being a fraud victim?
The first step is to become more aware of the conditions that make fraud possible. The fraud triangle is a model that describes three components that need to be present for fraud to occur:
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Motivation (or Need)
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Rationalization
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Opportunity
When fewer than three legs of the triangle are present, we can deter fraud. When all three are present, fraud could occur.
Motivation
Financial pressure at home is an example of when the motivation to commit fraud is present. The fraud perpetrator finds themselves in need of large amounts of cash for many reasons: poor investments, gambling, a flamboyant lifestyle, need for health care funds, family requirements, or social pressure. In short, the person needs money and lots of it fast.
Rationalization
The person who commits fraud rationalizes the act in their mind:
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I’m too smart to get caught.
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I’ll put it back when my luck changes.
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The big company won’t miss it.
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I don’t like the person I’m stealing from.
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I’m entitled to it.
At some point in the process, the person who commits fraud loses their sense of right and wrong and their fear of any consequences.
Opportunity
Here’s where you as a business owner come in. If there’s a leak in your control processes, you have created an opportunity for fraud. People who handle cash, signatory authority on a bank account, or financial records with poor oversight could notice that there is an opportunity for fraud to occur with the ability to cover the act up for some time.
Seventy-seven per cent of all frauds occur in one of these departments: accounting, operations, sales, executive/upper management, customer service, purchasing and finance. Banks, financial services, government and public administration, and manufacturing industries are at the highest risk for fraud cases. (Source: ACFE)
Prevention
Once you understand a little about fraud, prevention is the next step. To some degree, all three points on the triangle can be controlled; however, most fraud prevention programs focus on the third area the most: Opportunity. When you can shut down the fraud opportunity, you’ve gone a long way toward preventing it.
While we hope fraud never happens to you, it makes good sense to take preventative steps to avoid it. Please give us a call if we can help you in any way.
