Fraud in business happens everywhere and all the time. Don’t be misled into thinking it is always the “other guy” who gets embezzled. Fraud can happen to YOU!
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It happens in small businesses, large businesses, rural areas, metropolitan cities, new companies, established organizations, profit businesses, or non-profit entities – no business is spared. Regardless of the situation, someone figured out a way to “pull one off” on his or her employer. The amounts differ. They might be small or large, but they still sting the organization just as much. The scheme might have been caught in the early stages, or it might have gone undetected for months or years. The stories of misappropriations remain relatively the same except names, cities, organizations, and facts of the misdeeds change to fit the circumstance.
How can this happen, and why does it happen? Can it be prevented? One can get a better understanding of how fraud is perpetuated upon businesses by learning the three elements of what is commonly referred to as “the fraud triangle.” It consists of the following:
Opportunity – One possible reason for someone to commit fraud is that an opportunity simply exists. This is normally due to weak controls, a total lack of controls, or someone finding a way to circumvent existing controls. In many small businesses, opportunities exist because there is a lack of a check-and-balance system. This situation is quite common since one individual or a small group of individuals oversee many different functions in a small business with no segregation of duties.
The possibility of fraud exists whenever there is an opportunity for an employee to take advantage of a weakness in the system for personal gain. If there is no opportunity, then the chance of someone committing fraud is greatly reduced; however, there are no absolute guarantees! So, be aware fraud can happen to you!
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Motive – Another element that is usually present when someone commits fraud in a business is motive or individual pressure, which can be pressure to satisfy basic monetary or material needs that are not met in the traditional way, or pressure can also be motivated by greed or the need for power.
Although opportunity in a business can be reduced, it is problematic on the other hand for a business to reduce an individual’s motive to commit fraud. Motive is difficult to predict since every individual’s motive to commit fraud is different, just as everyone’s “breaking point” from stress is different. Employers, therefore, must be vigilant in observing how employees act at work, their general lifestyle, and what opportunities might exist for someone to be deceptive.
Rationalization – The third element of the fraud triangle is rationalization. This means that someone can rationalize in some way that what he or she is doing is OK – acceptable behavior within the mind of the fraudster. Of course, predicting rationalization on the part of an individual is, again, quite difficult as everyone can rationalize actions in different ways.
When opportunity exists, motive is present, and an individual can rationalize behavior, the timing can be the “perfect storm” for fraud to occur. Become familiar with the fraud triangle, and how the presence of these three elements can provoke certain individuals to commit fraud. Be alert to the danger signs. Fraud happens in small businesses, and fraud can happen to YOU!
Richard L. Weinberger, PhD, CPA has over 30 years experience as a financial and management consultant dealing exclusively with small businesses. He holds a PhD degree in organization and management, an MBA in management, a BBA in marketing, and a BBA degree cum laude in accounting. Dr. Weinberger currently serves in the capacity as the Chief Executive Officer of the Association of Accredited Small Business Consultants (AASBC) and authored the SEMP Approach: Simplified Examination to Maximize Profit, which is the foundation of the educational training for the AASBC. He is also the author of a new release book Propel Your Small Business to Success: Accelerated Actions to Maximize Profit.