How To Use The Fraud Triangle To Protect Your Company's Assets From Theft
Small business owners have many things to worry about, and it's hard to imagine that one of those worries is your employees or partners. But internal fraud and theft — asset misappropriation — can drain your company of funds for years before detection.
One of the best ways to protect yourself from asset misappropriation is to learn how to disrupt the fraud triangle. What is it? And how can it help you? Here's a short guide.
The Fraud Triangle
The fraud triangle is a theory that helps understand when and why people misappropriate assets within a company — or within any organization or unit. The triangle is made up of three key parts: pressure, opportunity, and rationalization.
How do these work together? Consider a bookkeeper at a company with access to cash and little supervision by trusting small business owners. If that bookkeeper runs up high debts, they experience financial need. The cash or checks passing through their hands without oversight leads to plenty of tempting opportunities. But many employees have similar access and don't commit fraud, skimming, or other theft. So what's different? The third part of the equation: rationalizing the actions within themselves.
How to Disrupt It
Disrupting the fraud triangle can prevent these aspects from building up together. Look for ways to prevent the pressure from any of the three points. Here are a few ways to start.
- Need. Be aware of your employees' and partners' personal and financial life. Do they have heavy spending habits? Do they like to gamble? Are they going through a divorce? Are college costs weighing down on them? Any of these perceived financial pressures can lead to theft. While you don't want to pry into their affairs, there may be ways to help relieve pressures they are experiencing.
- Opportunity. Limiting opportunity to misappropriate funds or assets is one of the best steps you can take. Separate duties so that single individuals — especially those with access to cash, inventory, and cash equivalents — have to share information. Have your company books audited by professionals with forensic accounting experience. Assign two employees to handle sensitive transactions, such as opening and closing or working with petty cash. In short, create more checks and balances at all stages of the process.
- Rationalization. While you can't prevent people from rationalizing bad behavior, you can make it harder. One way is to help them become more personally invested in the business. And be sure to show proper appreciation — verbally and financially — for good workers. Be kind, be reasonable, and develop a good relationship with workers. Why? It's harder to rationalize stealing from someone you like.
There are many other ways to disrupt the development of the fraud triangle for those involved in your business. To learn more about specific steps you can take to protect your company, talk to an experienced forensic accountant like Joseph Hanlon CPA today.