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Business 101

The Fraud Triangle

Eyecare Business October 1, 2010
Business 101

The Fraud Triangle

Karlen McLean, ABOC, NCLC

Fraud and embezzlement can happen anytime, anywhere, and with any type of business, big or small.

ABOVE SUSPICION

The average business loses seven percent of revenues to fraud. Especially with today's economy, it pays to be aware of how fraud opportunities and opportunists may use your business as their own private cash resource.

According to fraud and embezzlement expert Edward J. McMillan, CPA, in Forest Hill, Md., "You don't know what's going on in other peoples' personal lives, the bottom of the ‘me bag,’ or who likes to live on the edge. In almost every situation where fraud has been discovered, the guilty party is the person above suspicion."

THREE RED FLAGS

The fraud triangle consists of three red flags: rationalization, opportunity, and incentive.

First, the person rationalizes their decision, typically along the lines of:

■ The owner has money, I don't.
■ They won't miss the money, I need it.
■ I work harder than anyone, I deserve more money.

Second, the opportunity to commit fraud is the door that needs to be closed by the business. Start with a short managerial evaluation of your existing controls.

Third, the incentive is when the money is worth the trouble to commit the crime. Most fraud has collusion—someone connected with accounting or handling money is almost always the perpetrator—and is almost always committed during routine transactions.

"The purpose of effective internal controls," explains McMillan, "is to keep honest people honest by removing the opportunity factor. Work with an experienced CPA to thoroughly review your system of controls and correct deficiencies."

For more information, contact Edward McMillan at emcmillan@sprintmail.com or visit the website Nonprofitguru.com. EB

STOP Fraud Before It Starts

Stop fraud before it starts by initiating a few easy and costeffective habits:

1. For owners and CFOs, get two copies of of your company's bank statement. Have one mailed to the business and one to your house.
2. Do not write the bank account number on the back of checks—only your signature and "for deposit only."
3. Always check your payroll.
4. Always get audits.
5. Use a lock box and, if feasible, personally make the deposits.
6. Do not allow any employees access to your computer.
7. Investigate large checks that remain on the bank statement longer than one month.
8. If you create manual checks, use a gel pen—they embed into the checks, making them harder to alter.
9. Use credit cards (not debit cards or checks) for all possible transactions, and eliminate employee credit cards.
10. Bank online.

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