The Fraud Triangle: Reducing Fraud
Fraud is a serious issue, and while there is no way to guarantee it will not happen, it is important to try to understand why people commit it to try to prevent it. The fraud triangle simplifies the complicated structure of fraud by breaking it down to three elements: pressure, opportunity, and rationalization. When all three elements are present, fraud is likely to occur; however, if only two elements are present, fraud is not likely to happen. Of the three elements, a company can only control opportunity. So, if a company wants to reduce the chances of fraud, they need to eliminate the one element they can: opportunity. One way opportunity can be controlled is by implementing and enforcing good internal controls.
Internal controls are a business’s first line of defense. The Committee of Sponsoring Organizations (COSO) developed a solid definition for internal control. Internal Control can be divided into five components: control environment, risk assessment, control activities, monitoring, and information and communication. Control activities such as reconciling bank accounts regularly, checks and balances, and protecting checks from fraudulent use all make committing fraud much more difficult. Having good internal controls will not do any good if management does not implement and enforce the controls; however, even if internal controls are in place and are being enforced, this still does not guarantee that fraud will not occur. If a person’s pressure is high enough, and that person has already rationalized committing fraud, only a small window of opportunity is needed. Although large businesses deal with a significant larger amount of money, when it comes to fraud, small businesses are the ones who suffer the most. In fact, on average, small businesses lose twice as much per fraud case as large businesses. The main reason for this is because smaller companies do not want to spend the money to put internal controls in place that larger companies have.
Many large companies such as Enron, Tyco, and WorldCom are the exception to this, and these companies and investors lost billions of dollars. The frauds of Enron, Tyco, and WorldCom all demonstrate the epitome of what fraud can do to business. All the CEO’s, CFO’s, and other executives received the punishment for their actions, and while some of them did not get punished severely enough, one good thing did come from all of the accounting scandals: the accounting world was placed under the bright lights. The Sarbanes-Oxley Act (SOX) was created and implemented because of those scandals, and the accounting world has become much stricter. That being said, companies still fall victim to accounting fraud. People are always going to find ways to deceive and steal, but I truly believe that all things that are done in the dark will one day come to light.
Rosbel Antonio (Tony) Rauda
Master’s in Accounting – UST 2014