The Fraud Triangle

Katherine Strate Smith

Business Risk Manager

Strate Insurance Group, Inc.

This week is Fraud Week, a time for all business owners to educate themselves on the latest trends and causes of business fraud. As a Business Insurance Agent at Strate Insurance Group, I counsel my customers on ways to prevent fraud through protective financial safeguards. But to effectively combat fraud, businesses must understand what drives employees to commit fraud in the first place.

American sociologist Donald Causey believed that fraud occurrence required the presence of three factors: pressure, perceived opportunity, and rationalization. Together, they form the Fraud Triangle.

Pressure in this context means stress on the person committing fraud. It could be personal financial pressure, such as debt or gambling. Workplace pressure, such as shortfalls in company revenue, can also enable fraud. The employee must believe that the pressure cannot be solved using traditional, legal business methods.

Perceived opportunity is simply an opportunity to commit the crime. The person sees a way they can commit the crime without getting caught. Often, internal financial controls are not enforced, not monitored, ineffective, or nonexistent. There is likely no segregation of financial duties; the person who balances the books writes the checks. Someone could perceive an opportunity to commit fraud without anyone knowing.

Lastly, the person must rationalize this illegal act. Most fraudsters don’t see themselves as criminals, and many of them are first-time criminals. They must justify the crime to fit their morals and values. Many times, rationalizations are based on external factors, like wanting to maintain a certain lifestyle.

Hopefully you and your business have never been a victim of fraud. It is never too early to review your processes and procedures to ensure you have proper oversight to prevent fraud. If you want to learn more, visit www.fraudweek.com where you can find resources and information, including a Fraud Facts Quiz to test your knowledge.

Crime insurance is another protective safeguard you can purchase to help make your business whole again if fraud is committed. Talk to me if you want to know more: ksmith@strateinsurance.com or 423-318-5801.