The Fraud Triangle

Unfortunately, occupational fraud is becoming more prevalent than ever in small businesses. Occupational Fraud is the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets. The Fraud Triangle lays out the necessary factors that are usually present when fraud occurs:



The triangle consists of Opportunity, Incentive, and Rationalization. Opportunity exists when the control system in place allows for the opportunity for fraud to occur. Incentive occurs when the person is motivated to commit fraud (e.g., personal financial hardship). Rationalization is where the person creates a reason to commit fraud (e.g., they have been passed over for raises in the past and deserve the extra money).

Some other examples of fraud risk factors include the following:

1. Compensation based on performance (Incentive).
2. Lack of documented policies and procedures (Opportunity).
3. Lack of enforcement of policies and procedures (Opportunity).
4. Known history of illegal acts (Incentive).
5. Appearance of living beyond a person’s means (Rationalization, Incentive).

Behavioral red flags to watch for:

Click Photo to enlarge

For more information, the Association of Certified Fraud Examiners compiles a report based on occupational fraud committed and categorizes similarities between the cases, the perpetrators, and schemes. A link to their 2010 Report to the Nations on Occupational Fraud and Abuse is below:
http://www.acfe.com/rttn/2010-rttn.asp