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A woman in Concord, N.H. recently was arrested for embezzling over $ 1 million from her nonprofit employer. This woman was a payroll supervisor for the Crothed Mountain Foundation, a disabilities rehabilitation center. She committed the fraud by issuing additional payroll checks to herself and fraudulent payroll check to her daughter. She used the funds she embezzled to pay for medical bills (she was diagnosed with colon cancer), her daughter's wedding, vacations and donations to other organizations. Her case is a perfect example of the most basic frameworks used by auditors and fraud examiners in studies of fraud.

In the 1950s Donald Cressey conducted a study of convicted fraudsters. He attempted to determine how and why fraud cases occur. His discovery has let to the development of the fraud triangle, a useful tool in investigating fraud and a major part in the development of the new anti-fraud framework adopted by auditors. This fraud triangle explains the three factors present in every fraud case: need, opportunity, and rationalization.

The first factor on the path to fraud is a need. This need can be real or imaginary, light or heavy. In all cases though, the need is thought by the fraudsters to be real and otherwise unsolvable. High medical bills, gambling, alcohol, or drug addictions, or high debt are all popular needs that plague our society. When these costs become too much for employees to pay under normal means, they often feel they have nowhere to turn except to defraud their employers. This is usually an unconscious decision that theft is, at least in the fraudsters's mind, necessary to their survival. The other note worth making about the need factor is that, in fraudster's mind, it is not sharableable need. They feel ashamed or private about their problem and therefore cannot approach, family, friends, their employer, or other outlets to appeal for help. In the example above, the woman had severe medical bills from her cancer and wanted a nice wedding for her daughter.

The second factor, opportunity is usually the second step fraudsters take and where the actual fraud occurs. The opportunity generally presents itself when an employee has control over an entire area of the business (i.e. bookkeeping, payroll, management, payables, receivables, etc.). If no one else is reviewing or is included in a process, there is typically nothing to stop them from abusing their position.

Fraudsters may set up and pay fake employees, skim cash from deposits, pay fake invoices, or fake their financial position to obtain loans or bonuses they didn't earn. The woman in the above example used ghost employees as her opportunity. She was the only employee who could handle the payroll so there was no oversight or controls to prevent her from issuing false checks.

The third factor, rationalization, keeps the fraudster from feeling guilty about their deed. As in the example that started this article, every fraudster will develop a reason for the stealing, and it will not reflect badly on them. They will blame their actions on their employers, the government, or simply say they were doing what they had to in order to maintain a certain lifestyle for their family. The rationalizations used are: vast, but if you talk to someone who has been caught for fraud they will most likely express regret that they were caught, but not that they committed the crime. Consider again,the woman in our example, who said she was ashamed of what she did but that, "if I didn't have the stress, maybe I wouldn't have gotten sick and wouldn't have had the bills and maybe (the stealing) wouldn't have ever started."

The important lesson to take from this information is that, if an employer can reduce, or at least be aware of, the factors in the fraud triangle, there is less chance a person will walk down the path of fraud. Employers need to be aware of their employees' lifestyles and problems. Employers should set up controls to prevent the opportunity for theft. As always, fraud can happen to anyone and preventing fraud is better than prosecuting it, so take all the steps you need to today to keep your business running strong and fraud-free.

Marie Bray, CPA is a Certified Fraud Examiner and works at the Great Falls office of JCCS.

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