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The fraud triangle: Does employee fraud increase during a recession?

 

The fraud triangle: Does employee fraud increase during a recession?

Oct 15, 2019

News stories have increasingly focused on whether a recession is in the near future of the economy. Will there be a recession? It’s still too early to tell, but this is the perfect time to talk about fraud’s relationship with the economy. 

The perceived pressure to commit fraud

The truth is, desperate times cause desperate people to do desperate things. In a recession, people are keenly focused on their families’ survival, whether it’s putting food on the table, sending their children to school or, as has been seen multiple times, paying medical bills. 

In a stalling economy, we see a spike in bookkeeper fraud, internal embezzlement and other types of occupational fraud. This is because 1) people are more motivated to commit fraud and 2) because businesses searching for ways to save are looking internally as well as externally, meaning they’re more likely to uncover fraud. 

This growing pressure individuals feel during a recession to commit fraud is one-third of the Cressey Fraud Triangle. Created by criminologist Donald Cressey, the fraud triangle theorizes that individuals are motivated to commit fraud under the perfect storm of three elements: perceived pressure, perceived opportunity and perceived rationalization. 

The rationalization to commit fraud

Rationalization takes many forms. Maybe the employee tells themselves that they’ll pay the money back. Or they justify it with their anger at not getting a raise, rationalizing that they deserve what they’re stealing. Or maybe the business owner talks about spending their kids’ winter break at their second home in Vale, and the employee committing fraud thinks, “They’ll never miss this.”

Whatever the case, if there’s perceived pressure to commit fraud and a perceived rationale behind it, taking advantage of a perceived opportunity probably won’t be too far behind. 

The perceived opportunity to commit fraud

Business owners don’t have too much control over an individual’s perceived rationale or pressures; however, the third element, opportunity, is where they can reduce their risk of fraud, especially during a stalling economy.

Businesses often present many ripe opportunities to commit fraud. Cost controls on staffing can result in simple-to-prevent mistakes like leaving blank checks on top of filing cabinets, leaving medical supply closets unlocked, assigning the same individual to handle both billing and write-offs, or assigning the same individual to handle cash, deposits and the monthly bank reconciliation. A lack of strong internal controls can make any business a victim. 

One issue is that owners don’t want to think that any of their employees could betray them in this way. They might have a small, tight-knit team. Or their bookkeeper may have been with them for many years. They consider them a part of the family and give them complete control over their books without any oversight. Then they’re shocked when they discover this trusted individual has stolen large dollar amounts from them over the years.

Minimizing your risk of fraud

Introducing strong internal controls is the best way to reduce your risk of internal fraud. Segregating duties and providing oversight are two big controls that can help prevent fraud, as well as leveraging good accounting software. For example, many financial institutions, as well as commercially available software, enforce segregation of duties by separating who prepares bills to be paid and who approves them. 

You can also set up set up positive pay with your financial institution, which allows you to send them details on checks you’ve written that you approve to be cleared to prevent counterfeit checks. This is currently the best available methodology to prevent counterfeit checks. 

We also recommend reviewing your bank statements each month, not only to be able to recognize the patterns of your business and identify what looks off but also to pay close attention to cash disbursements and refunds. Don’t just give this a token effort; an individual stealing from your business will quickly figure that out. 

With your audit trail permanently activated in your accounting software, you should review those records periodically as well. Question why certain edits made were necessary, such as changes in vendor names or check numbers, activating or deactivating vendors, and follow up on irregularities. Plus, prohibiting backdated changes in your software can prevent employees from hiding account irregularities by altering previous year transactions. 

Using the fraud triangle to protect your business

Regardless of whether there will be a recession, it’s important to review your internal controls and determine whether you should make improvements or changes. A risk assessment using an experienced third-party like Wipfli can identify any remaining opportunities in your business for an employee or an outside individual to commit fraud and recommend ways to reduce your risk.

Learn more about Wipfli’s fraud and forensics services, or keep reading on about preventing fraud:

The secrets of fraud prevention

Financial fraud: what to do when an employee steals from you

Financial fraud in practice: this manager found many ways to steal from a clinic

Author(s)

David Friedman
David G. Friedman, CPA, CFE, CFF, CICA
Partner
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