The Fraud Triangle – identifying your risks

Jarrod Lean
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The current cost of living crisis due to factors such as increasing interest rates, salaries not keeping up with inflation has created a climate in which the fraud triangle can emerge. An Internal Audit is a valuable function that can be used to assess the design and effectiveness of mitigating fraud controls within your company.

The Fraud Triangle is a concept that outlines the motivations behind why individuals commit workplace fraud.

The three key elements responsible for fraud are:

  • Pressure
  • Rationalisation
  • Opportunity

In the current environment of rising living expenses due to inflation, interest rate increases, and higher costs of services and labour, most people are experiencing heightened financial “pressure”.

Exacerbating these existing pressures, wages and salaries are not keeping up with the macro environment, imposing additional strain and pressure on the disposable household income. This may result in employees “rationalising” the need to receive more from their employer. This often starts with inconsequential behaviour such as taking home more office stationery, or utilising business assets for personal use (such as plant and fleet assets, corporate and fuel cards, or corporate subscriptions for services such as background or credit checks); gradually progressing to more sophisticated and serious fraud such as manipulating overtime records or misappropriating funds.

Given the current scenario where both pressure and rationalisation coexist, it is more important than ever for organisations to have effective and fit for purpose mitigates of fraud – or reduce the ‘opportunity’ – as much as possible.

With the current climate potentially resulting in higher attempts of fraudulent activities and many organisations now considering Internal Audit Programs, it is the perfect time to ensure Internal Audit has a strong focus on assessing fraud controls in all reviews performed.

Internal Audit Programs

An Internal Audit is a valuable tool that organisations can use to conduct a comprehensive fraud assessment throughout the entire company. At the very least, fraud can be prioritised as a central focus for all reviews conducted, specifically outlining it within scoping and terms of reference. 

Will an Internal Audit ensure no fraud?

Absolutely not, and there is no guarantee. However, it is a great way to communicate to all stakeholders that fraud is on the radar, discouraging fraudulent activities from occurring within the organisation.  

Additionally, it will provide management and Boards the opportunity to enhance and strengthen control measures, mitigating fraud risks and reporting crucial insights into key strength areas to management and the Board.

An Internal Audit can also contribute to the creation and evaluation of continuous monitoring tools aimed at detecting possible warning signs such as excessive overtime, unusual expenses, patterns, and anomalies, and support your organisation to identify, evaluate, mitigate, and oversee fraud risks.

If you have been contemplating conducting an internal audit or you’d simply like to learn more, please don't hesitate to get in touch with us.