The Fraud Triangle and Emergency Situations

Fraud is a word that carries significant weight. For business owners, it can be scary and create discomfort. But to be able to prevent this from happening, especially as COVID-19 creates an environment where fraud is more likely, you need to acknowledge what leads to fraud and build a plan to prevent it.

The Fraud Triangle and Emergency Situations

Fraud is a word that carries significant weight. For business owners, it can be scary and create discomfort. But to be able to prevent this from happening, especially as COVID-19 creates an environment where fraud is more likely, you need to acknowledge what leads to fraud and build a plan to prevent it.

• 1. Opportunity;
• 2. Motivation; and
• 3. Rationalization.

Opportunity

• Theft of highly sought-after equipment including face masks and gloves;
• Theft from empty or unsecured houses, towns, or offices; Inflated costs due to scarcity of services;
• Inflated costs due to scarcity of services; Limited abilities to effectively segregate accounting responsibilities;
• Limited abilities to effectively segregate accounting responsibilities;
• Limited abilities for dual signatures;
• Gaps in internal control systems;
• Management distraction towards the emergency; and Lack of oversight of employees, contractors and vendors.
• Lack of oversight of employees, contractors and vendors.

Motivation

Rationalization

• Personal financial pressure such as making ends meet or high debt; Unexpected unemployment and or lack of ability to gain employment due to emergency situations such as evacuations,
• Unexpected unemployment and or lack of ability to gain employment due to emergency situations such as evacuations, government intervention and restrictions on business operations; Business financial pressure including debt repayment, covenants and reducing revenue and cash flow;
• government intervention and restrictions on business operations;
• Business financial pressure including debt repayment, covenants and reducing revenue and cash flow; Increased economic uncertainty from business and investment losses;
• Increased economic uncertainty from business and investment losses;
• Increased medical expenses and or loss of medical benefits coverage; and
• Addictions and vices may increase during times of emergencies as a coping mechanism.

Trusted persons can become violators if they can adjust perception of themselves to justify their actions. Rationalization can be difficult to see. This cognitive stage requires the individual can be difficult to see. This cognitive stage requires the individual be able to justify the crime in a way that is acceptable to his or her a internal moral compass. It may not appear rational to others.

Most fraudsters are first-time criminals and do not see Most fraudsters are first-time criminals and do not see themselves as criminals, but rather a victim of circumstance. This can be enhanced in emergency situations due to increased stress. The following rationalizations may be of higher substance to The following rationalizations may be of higher substance to an individual during times of a pandemic or natural disaster when stress and cognitive impairments are more prevalent:

• To take care of basic needs and family: “I was just trying to support my family.” The perceived need to protect a business: “The business would
• support my family.”
• The perceived need to protect a business: “The business would go under if I didn’t do it.” The perception that the business treated them wrong: “The
• go under if I didn’t do it.”
• The perception that the business treated them wrong: “The business cut my hours.” An (initial) intent to put the money back: “I’m only borrowing
• business cut my hours.”
• An (initial) intent to put the money back: “I’m only borrowing the money.” The perception that the business will be insured: “They will just
• the money.”
• The perception that the business will be insured: “They will just get reimbursed from insurance.”
• get reimbursed from insurance.”

Fraud Control Activities

Fraud control activities are generally classified as either preventive (designed to avoid a fraudulent event or transaction) or detective a (designed to discover a fraudulent event or transaction), though (designed to discover a fraudulent event or transaction), though some control activities serve both purposes¹. The following are fraud control activities that can be undertaken during an control activities emergency situation:

• Assess your new internal control environment to ensure changes have not compromised control functions; Complete a Fraud Risk Assessment to ensure the risks
• changes have not compromised control functions;
• Complete a Fraud Risk Assessment to ensure the risks associated with your new work environment are proactively mitigated; Review process control activities to ensure that circumventions
• associated with your new work environment are proactively
• mitigated;
• Review process control activities to ensure that circumventions and overrides do not occur or are adequately documented and authorized; Ensure adequate controls are in place for contractors and third parties for invoice verification and supporting documents;
• and overrides do not occur or are adequately documented and
• authorized;
• Ensure adequate controls are in place for contractors and third parties for invoice verification and supporting documents; Review employee payroll with a focus on inflated hours,
• parties for invoice verification and supporting documents;
• Review employee payroll with a focus on inflated hours, overtime claims, unusual payments, fictitious employees, and expense reports; Ensure owners and management convey a unanimous message that policies and procedures still apply, and that fraud
• overtime claims, unusual payments, fictitious employees, and
• expense reports;
• Ensure owners and management convey a unanimous message that policies and procedures still apply, and that fraud prevention is a priority for all employees; Maintain active communication within teams and ensure HR is checking in on employees; and
• message that policies and procedures still apply, and that fraud
• prevention is a priority for all employees;
• Maintain active communication within teams and ensure HR is checking in on employees; and Ensure your employees, contractors and third parties are aware
• checking in on employees; and
• Ensure your employees, contractors and third parties are aware of your whistleblower hotline.
• of your whistleblower hotline.

Joleen Collier, CPA, MFAcc, CFE, CIA Joleen Collier, CPA, MFAcc, CFE, CIA Senior Consultant, Forensics and Litigation Support 780.733.8689 [email protected]

Lisa Majeau Gordon, FCPA, FCA, CA-IFA, CFE, CFF Lisa Majeau Gordon, FCPA, FCA, CA-IFA, CFE, National Leader, Forensics and Litigation Support 780.453.5375 780.453.5375 [email protected]

1. The Committee of Sponsoring Organizations (“COSO”) of the Treadway