Welcome to the 1347 podcast , episode six Episode six Very excited to bring this topic to all of the listeners today . It's a very important topic . If you are a investigator , compliance professional , auditor , analyst anyone who has the responsibility of corporate compliance and oversight it's entitled Understanding and Applying the Fraud Prevention Triangle , or the Fraud Triangle , or the fraud triangle originally developed by Dr Donald Cressy Back in the 1950s . Dr Cressy was a prominent penologist criminologist that is often known as the father of of white collar fraud because of his great work in that area . Dr Crassey specifically delved into the social psychology of those individuals engaged in white-collar crime , such as bank embezzlers or those who are embezzling money from banks and other organizations . He also delved into some of the external factors engaged in organized crime and why individuals were paired in those types of organizations . So during his lifetime he performed some tremendous amount of work and left us with a treasure trove of information and steps to follow in his footsteps . So let's get with it .
Speaker 1There's basically three factors that make up the fraud triangle um , pressure , opportunity and rationalization . When we think about pressure , uh , and we're not talking about the career criminal of those individuals with , you know , some severe mental health condition that you know , drives them to commit criminal acts or unethical behaviors . This is the normal person who has an average position in a white-collar setting , may it be a hospital , may it be an office manager in a doctor's office , maybe it be a bank teller , maybe it be a bank manager . These are the types of occupations and individuals that the triangle is addressing . But when it comes to pressure , typically , according to the theory , most individuals require some form of pressure to commit a criminal act . That pressure could be internal , could be external . Externally speaking , it could be something as simple as a gambling debt or addiction to alcohol or drugs , or just having bills that needs to be paid and they don't have any other way of addressing it other than resorting to some form of criminality .
Speaker 1The next factor factor is opportunity and it , out of the three , it is the most uh important in in my professional experience , the most important factor to stress if your job is compliance or oversight , or responsible for minimizing , um , that activity within your organization . Opportunity An organization can totally , totally minimize the opportunity for theft and fraud within the workplace and it has to be present for a fraudster or perpetrator to commit the act . Typically , in the case of fraud , it's usually a temporary situation where there is a chance to commit that act , small window and a high threshold of that act not being discovered , at least immediately . And if a company doesn't actively think in that mindset , then they are going to be ripe for this type of behavior and this type of act . The third factor is rationalization , and typically this is kind of the internal cycle of a person . It's the justification of why their criminal act or unethical behavior is justified . Meaning I am not getting paid enough , or I am not being recognized for the great work that I'm doing and or this company is making hundreds of millions of dollars . They won't miss a few thousand or even a few hundred thousands of dollars . So therefore the fraudster or the perpetrator will rationalize or develop that mental position that what they're doing is not only justified but they're right in doing so . So those are the three factors .
Speaker 1Once again Now , based on my experience , I would like to add another category , and this is based off of my experience in dealing with white collar fraud and white collar professionals in this arena , and that four factor would be prestige , specifically in academia or in the research community where individuals are falsifying , fabricating and or committing fraud to be recognized right Because for some reason , they're looked over for certain awards or certain promotions , or the quality of their work or the depth of their work is not being published , or if it is published , it's not being recognized as groundbreaking and life-changing work . Life-changing work . So therefore , they will engage in falsification , fabrication or some form of research fraud as a way of once again rationalizing their act Pressure , opportunity , rationalization and , I might add , based on my experience , prestige . Next , how would an organization or the individuals within an organization who has that responsibility , how would you go about applying the fraud triangle within your organization to make your organization more resilient against fraud ? So , within your organizational framework , you would have to analyze all three or all four factors and how vulnerable your organization is to that . That can be done through surveys , it could be done through peer reviews , it could be done with individual interviews , it could be done with work groups . There's a number of ways to peer out and analyze where those vulnerabilities may be .
Speaker 1After action reports if there is ever an incident involving unethical behavior or reportable fraud , when that matter is concluded there must be an after action report , and that after action report must look not only backward but forward of how to prevent it , why it happened , but how to prevent it in the future . Therefore , the companies must look at ways to apply the fraud triangle to reduce those opportunities that will inevitably present itself within the workplace . How do you relieve pressure as an oversight official official responsible for compliance ? That company could have an impact on that person's ability to earn a living . Obviously , there are certain programs and organizations that address work-life balance right that address if you're having issues in your personal life . There are human resource considerations and opportunities for those individuals , for those individuals to address those issues through some form of resource through the workplace where they can remain anonymous , ie whether it's a gambling problem or whether it's a drug addiction issue or some other issue that makes an otherwise normal employee into a fraudster .
Speaker 1How do you minimize opportunity within the workplace ? And from my experience , the number one way to do that is transparency within the organization and having that organizational framework where there is training and awareness and education about fraud within the workplace . That not only the ground level employees must participate in these training sessions , whether it's biannual or every year or however you want to structure that within your organization , but they must participate , must be documented and you have to hold them accountable when they do not . That's one way to minimize those opportunities within those workplaces . Importance of auditing periodically and addressing those deficiencies or defective areas immediately . And there must be accountability and to ensure that from the top to the bottom , that leadership is behind the program and leadership should speak about these programs at every opportunity in open form to make sure that everybody understands that . Another factor to minimize opportunity is the , the reiteration , when new employees come into the organization , that they understand that this is the culture . The culture is this . The new employees must go through a new employee orientation session immediately and understand that and have those individuals that are senior and position of authority within the organization really stress that and make it a point to stress that . But how do you target rationalization you can create that culture of this is not going to be acceptable .
Speaker 1There is a zero tolerance policy toward unethical behavior and reminding customers , vendors , employees on a regular basis that the cost of fraud is tremendous . There is always a residual effect when fraud is being committed . Whether it's pricing , whether it's quality , whether it's reputation . There is a cost for fraud . Bi estimate annually non-healthcare related fraud is around $40 billion a year . That's $40 billion with a B and that is what can be tracked , reported and or investigated Tremendous amount of fraud that goes undetected , uninvestigated , unreported .
Speaker 1So to recap , the fraud prevention theory basically states that for fraud to occur , white collar fraud to occur , white-collar fraud to occur , there must be some internal or external stimuli . That involves pressure , the opportunity must be present and there's some form of rationalization by the actor . And there's some form of rationalization by the actor . And I've added , from my experience in dealing with academia and research , fraud , prestige . Prestige is something that can be added .
Speaker 1I've seen other forums , other lecturers and other publications reference arrogance and , um , I don't uh necessarily disagree with arrogance as being a subset or a sub factor , uh , in the social psychology of the actor or the orster , but , um , as a main component , not necessarily
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Speaker 1So , uh , I would put arrogance as a subset of prestige in or subset of rationalization in their minds . They think they're smart enough not to get caught and that is a form of arrogance as well , but not as a main component of the far triangle . You the opportunity to look inward within your organization , if you are in that position , about what those vulnerabilities are , how you can first of all identify those points on the fraud triangle and then how can you apply the various metrics that are available to you within your organization to not only relieve pressure , minimize or mitigate the opportunity , and be focused and target the rationalization ? As always , I thank you for tuning in and your support , not only domestically but around the world , and we thank you . And if we can be of assistance , please reach out to us at info at texasoversightcom . Thank you and have a great evening .