11/18/2011

The F Word. The one word that business owners hate to hear. Fraud.

As a small business owner you spend a great deal of time building your business. Many hours go into designing marketing campaigns, creating workflows, serving your clients and attempting to maintain sanity. All of this hard work will go to waste if a company does not do something to minimize their risk for fraud.

It can happen in many ways; cash skimming, stealing inventory or even overstating expense reports. Sometimes the fraud can be minor but the unlucky few can have their reputation tarnished or even be put out of business. The Association of Certified Fraud Examiners states, “Fraud is now so common that its occurrence is no longer remarkable, only its scale. Any organization that fails to protect itself appropriately faces increased vulnerability to fraud.” Ouch.

So how does fraud occur and what can you do to prevent it?

The Fraud Triangle

Donald R. Cressey, a noted criminologist, created the Fraud Triangle which consists of Opportunity, Rationalization and Pressure. Pressure is what causes a person to commit fraud. Pressure can include almost anything including medical bills, expensive tastes, addiction problems, etc. Most of the time, pressure comes from a significant financial need/problem. Opportunity is created by weak internal controls, poor management oversight, or through use of ones position and authority. Failure to establish adequate procedures to detect fraudulent activity also increases the opportunities fraud for to occur. This part of the Fraud Triangle is the easiest to control as you can create measures that would deter fraud. Rationalization occurs when the person committing fraud justifies their actions. This could also be considered cognitive dissonance. The key to deterring fraud is breaking this fraud triangle.

How to Prevent Fraud

It is difficult to prevent Rationalization and Pressure but as an owner or manager you can reduce Opportunity.  Stay tuned for Part Two, which will cover steps on reducing opportunity for fraud in your business.

Cristina Garza

Accountingprose

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