Protecting Your Nonprofit from the Fraud Triangle

By Samantha Abraham

Have you ever heard of the fraud triangle?

The fraud triangle is a visual way of explaining and understanding the three factors that combine to create the perfect circumstances for fraud: motivation, opportunity and rationalization.

Motivation is the force driving someone to commit fraud. It isn’t always malicious or even necessarily criminal. The employee or volunteer isn’t always out to cheat the system or seek revenge against an employer. Rather, an individual may be experiencing acute or chronic personal financial stress, perhaps due to overwhelming medical bills, a spouse that recently lost a job or increased costs associated with being a caretaker for a loved one. While stealing funds from an organization isn’t an answer to their problems, these high-stress situations can be motive enough.

Opportunity is the environment in which someone believes that it will be difficult to be caught committing fraud. Once someone is motivated to commit fraud, they often ask themselves, “Am I able to conceal my actions? Am I able to get away with this?” If the answer is yes, even the best employee or volunteer may be tempted if their motivation is strong enough.

Rationalization the final piece of the puzzle, and it is the means of justifying the act. Once an employee or volunteer has the motivation to act fraudulently and they’ve devised their opportunity to do so, they will find a reason for their behavior. They may tell themselves, “It’s just a few dollars. I’ll pay it back right away. No one will miss it for a few weeks,” or “I work very hard, so I deserve this money.” However, the “little” amounts and “few dollars” they start to take will add up over time because when individuals aren’t caught, they are more likely to continue to seize opportunities to commit fraud.

While we all like to believe that the world is made up of inherently good people who do no wrong, in accounting we operate under the assumption that, given an opportunity, anyone and everyone will commit fraud. We’re equal opportunity pessimists and we build our systems to protect both the organization and the accounting professionals working within the systems.

Fraud doesn’t happen within a vacuum; the perfect storm could be developing in your nonprofit if you don’t take proper precautions and implement important internal controls. Understanding the fraud triangle is an integral part of protecting and designing your accounting and bookkeeping processes and procedures. While you don’t have control over all three factors of the fraud triangle, there are still steps you can take to safeguard your organization, which we’ll cover in the next installment of this series.

 

Samantha Abraham is the CEO & Co-Founder of My Paper Pusher LLC, a bookkeeping firm specializing in building relationships with nonprofits and small businesses. She is a Certified QuickBooks Proadvisor and holds two certificates in nonprofit financial management. Samantha’s goal for her clients is to give business owners and nonprofit leaders the time, energy and resources to pursue their passion and focus on their strengths while providing exceptional services to streamline operations and catalyze their business’ progress and growth. Learn more at www.mypaperpusher.com.

 

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