1. The Fraud Triangle
Developed by Donald Cressey, this model explains the three elements that must be present for occupational fraud to occur:
          [PRESSURE / INCENTIVE]
               /          \
              /            \
             /              \
            /                \
[OPPORTUNITY] -------------- [RATIONALIZATION]

  • Pressure / Incentive: The motivation behind the fraud (e.g., personal debt, addiction, or executive bonuses tied to aggressive profit targets).
  • Opportunity: The technical ability to commit and conceal the fraud without being caught. This is usually caused by weak internal controls.
  • Rationalization: The internal justification the fraudster uses to excuse their behavior (e.g., “I am underpaid,” “I am just borrowing the money,” or “The company can afford it”).

2. Designing Effective Internal Controls
Internal controls are the policies and procedures an organization uses to ensure reliable financial reporting, operational efficiency, and legal compliance.
  • Segregation of Duties (SoD): To prevent fraud, four fundamental functions must be split among different employees:
    1. Authorization: Approving transactions (e.g., a manager signing a purchase order).
    2. Custody: Handling the physical asset (e.g., a warehouse clerk storing inventory).
    3. Recording: Entering the transaction into the accounting software (e.g., a bookkeeper posting a journal entry).
    4. Reconciliation: Verifying records against independent sources (e.g., an internal auditor checking bank statements).

  • Authorization Matrices: Clear systems showing who can sign off on expenses based on dollar thresholds.
  • Physical and Digital Barriers: Using security badges, passwords, firewalls, and security cameras to restrict access to sensitive cash rooms and accounting ledgers.
  • Independent Verifications: Performing regular, unannounced asset counts and mandatory rotations of employee job duties.

 
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