May 27, 2014

Recently, I saw a quote that served as a good reminder to me that fundamentals and simplicity will quite often rule the day over complexity.  The quote was conveyed by a key figure in one of the most high profile fraud cases in a century.  The quote from Kenneth Lay goes as follows, “I take full responsibility for what happened at Enron.  But saying that, I know in my mind that I did nothing criminal.”

One of the fundamentals in the study of fraudulent behavior is a concept known as the fraud triangle.  Each corner of the fraud triangle represents a quintessential ingredient to a perfectly baked fraud scheme.  Those three components are: motivation, opportunity, and rationalization.  If a company can chop off one of the corners of the fraud triangle, they will be better equipped to prevent fraud from impacting their business.

For the everyday citizen, motivation is created by the life pressures that push people to do the wrong thing in the right set of circumstances.  Opportunity commonly comes through as an absence of solid internal controls; therefore, the primary target for the prevention of fraud is improving and/or establishing right-sized internal controls.  Even with a healthy dose of motivation and opportunity, the everyday citizen will still stop themselves from perpetrating a fraud unless they can rationalize and invent a justification for their behavior.  The quote noted above from Kenneth Lay is loaded with rationalization.

Enron was a massively destructive fraud that brought down much more than just an energy brokerage business; it was the first crack that eventually shattered Arthur Andersen, it evaporated the hard-earned retirement of thousands of employees, and it created the first workings of a new internal control paradigm in the form of the Sarbanes-Oxley Act.

It was also a highly complex scheme with a lot of moving parts, diversion, and cover-up.  Yet at its root was a leader who espoused a fundamental and simple quality of every fraud scheme: he rationalized his behavior when presented with pressure (to perform for Wall Street) and opportunity (to shift and hide liabilities).

I was reminded of a lesson from this quote and I would challenge you to learn and understand the fundamentals of the fraud triangle, a profoundly powerful concept in the world of fraud.  Understand them for what they are, and understand how they apply to your company and what you are hoping to protect.

© Clark Nuber PS and Focus on Fraud, 2014. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Focus on Fraud with appropriate and specific direction to the original content.

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