Incorporating the “Fraud Triangle” into Compliance Risk Assessments

In my Corporate Compliance Insights column, I have run a series of articles discussing how Compliance and Ethics Professionals might incorporate the Fraud Triangle into their Annual Compliance Risk Assessment(s).  Though I cannot re-print the articles here, below are summaries of each with a link to each respective piece in the series.

This is a fascinating subject for mixed compliance and fraud professionals like myself. Incorporating the factors of the Fraud Triangle into compliance related areas has been very effective for me in the compliance and Independent Corporate Monitor work that I do.  Feedback has been very positive on this series and I hope that the articles may provide you with some practical ideas that will help you improve the effectiveness of your own Compliance & Ethics Programs.

The first in the series is an Overview of the Fraud Triangle, which introduces the theory and sets the stage for the articles to follow.  It also defines and distinguishes “Occupational Fraud” from “Predatory Fraud.”  Though the Fraud Triangle was developed by a criminologist and concerned criminal acts associated with fraud, I have found that the concepts also apply to less than fraud-related criminal actions, such as violating a compliance policy or acting unethically in the course of an occupation.

The next article in the series explores the “Opportunity” factor of the Fraud Triangle, which relates to one’s ability to commit fraud, violate a compliance policy or act unethically, and is affected by such things as, among others, internal controls, knowledge & training, authority, and experience.

Part 3 of the series examines the “Rationalization” factor of the Fraud Triangle, which relates to a person’s ability to internally justify/rationalize their unethical, wrongful or criminal actions.  This is often affected not only by a person’s individual moral standards, but also by the ethical tone within an organization and the person’s perception(s) about the fairness and equality of rewards and punishments for actions and behavior.

The next in the series looks at the “Motivation” factor of the Fraud Triangle, which generally relates to an “unshareable need” that arises within a person’s life.  This is the one factor of the Fraud Triangle that an organization has the least control over, as well as the most difficult one to be assessed.  This “unshareable need” is a personal need that can arise from a broad range of things, ranging from common and ordinary life issues (i.e. a divorce) to those that are more nefarious (i.e. drug addiction).  As this need increases within a person’s life, so to does the risk of that person taking actions contrary to an organization’s Code of Ethics and/or Compliance Policies.  To help illustrate this, I included in this article some very interesting and real-life examples that I have encountered over the course of my 20 plus years of fraud investigations experience, including many from my service as an FBI Agent.

The final in the series examines the “Perception Factor”.  This is technically not a part of the Fraud Triangle and concerns the perception by an individual regarding whether or not they will get caught if they violate a compliance policy, act unethically or commit a fraud.  I have found that this can be an overriding factor in a person’s decision whether or not to violate a compliance policy, act unethically or commit a fraud, even when the three factors of the Fraud Triangle are at a high risk.

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The Fraud Guy

John has over 24 years of fraud investigations, forensic accounting, corporate compliance & ethics, and audit experience. He has applied his extensive experience in these areas across a wide array of areas and industries, frequently assisting counsel, government agencies and companies with internal corporate investigations and other matters arising from alleged fraud or misconduct. John is a thought leader and expert on Corporate Monitors/Compliance Monitors, a practice area involving the imposition of an independent third party by a gov't agency or department upon a corporation to verify that corporation’s compliance with the terms of a settlement agreement. John has previously served in a leadership role in a federal Monitorship and was involved in four other federal monitorships: two as the named Monitor, one as the "Independent Business Ethics Program Evaluator" and the other in support of the named Monitor. In these roles, John has reported to the Department of Justice, the Department of Interior, the Department of Transportation, the Small Business Administration, the Federal Highway Administration and the Massachusetts Department of Transportation. His practical experience as a Corporate Monitor and extensive knowledge in this area is currently being applied to the development of formalized Standards for Corporate Monitors, through John's Membership on the Task Force on Corporate Monitor Standards of the American Bar Association. John is a frequently sought speaker on the topic and has provided practical advice, ideas and strategies to lawyers, government officials, and corporate executives involved in such matters, as well as newly appointed Corporate Monitors. Prior to Artifice, John spent over 5 years as a leader in the fraud investigations and forensic accounting practice of a large publicly traded international financial consulting firm. Before that, he served for 10 years as an FBI Agent, specializing in complex fraud investigations.

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