The Fraud Triangle

Keeping an Eye on Aunt Gertrude

Owning a business can be like having a family. You have a lot of love and trust for the members of your family, but that doesn’t mean you don’t keep an eye on crazy Aunt Gertrude who’s been known to swipe a few bucks from your wallet once in a while.

While you don’t want to constantly be looking over the shoulders of your employees and questioning everything they do, it is important to be aware of the warning signs of fraud to help protect your ‘family.’

Generally, in business fraud comes down to one of these three:

  • Asset Misappropriation: This can be a plethora of things from embezzlement, stealing money from petty cash or checks, stealing inventory, submitting false expense reports or timecards, or stealing intellectual property.
  • Financial Statement Fraud: Falsifying or manipulating reports, inflating costs, alter earnings.
  • Corruption: Accepting bribery or kickbacks.

There’s commonly three circumstances that lead to fraud:

  1. The pressure or incentive to commit fraud – “My family is really struggling this month and I need to provide for them.” or “I have to meet my numbers this month or the boss will be upset.”
  2. The opportunity to carry it out – “I keep the petty cash in my desk and no one else really pays attention to what’s in there.” or “If I just change the date on these deposits, this month will look better.”
  3. The ability to rationalize or justify the fraud – “I have worked hard for this company and no one appreciates all I do.” or “I’ll work harder next month to make up the difference.”

These three circumstances come together to form the Fraud Triangle:

The Fraud Triangle


Avoiding Fraud

Now that you know what most likely precedes fraud you can devote energy to avoiding it. Put procedures in place that will ensure a checks and balance system and accountability is taking place in your business. Pay attention to your employees and the circumstances around them and just maybe Aunt Gertrude won’t snag that $50 from your wallet next time.