The fraud triangle is a model that is frequently used to illustrate the factors that can cause someone to commit occupational (workplace) fraud. Most occupational fraud isn’t committed by seasoned or experienced criminals. It is rather an issue of three factors: opportunity, pressure, and rationalization.
The following case study, one you may have read about in your local newspaper, is a perfect illustration of the three factors that lead to occupational fraud.
In 2012, Rachel Duncan was sentenced to 30 months in federal prison and ordered to repay $367,508 in restitution to the Hospitality Association of South Carolina (HASC). Ms. Duncan had been the accountant for the HASC. She was hired in 2001 after HASC’s previous bookkeeper was fired for embezzling money. Last fall, I met with Rick Erwin to learn more about this case. Mr. Erwin, Chairman of the Board and acting CEO of HASC at the time the theft was discovered, engaged The Hobbs Group, a Columbia, SC-based investigation firm, to perform a full investigation of HASC finances after someone in the financial community notified the Secret Service of a possible crime.
Little is known about the embezzlement committed by the bookkeeper previous to Ms. Duncan, other than after she was dismissed, internal control was reviewed and strengthened to prevent future losses. Ms. Duncan became acclimated to her new responsibilities and procedures, and proved to be a competent and trustworthy employee. As her tenure lengthened, she was given more responsibility and oversight of her responsibilities was decreased. Procedures established after the previous embezzlement were relaxed as confidence in Ms Duncan’s abilities increased and as a friendship between her and the CEO developed. She eventually became responsible for nine bank accounts and either was given, or assumed, authority to write and sign checks, including payroll checks, and make deposits.
The Pressure side of the Fraud Triangle is defined by the Association of Certified Fraud Examiners as “perceived unsharable financial need.” Investigators soon discovered that Ms. Duncan had a gambling addiction that started with video poker then escalated to on-line gambling when South Carolina outlawed video poker in 1999. The stolen association funds were diverted into Ms. Duncan’s personal bank account and from there, funds were wired to off-shore gambling payment processors.
Justification is what the embezzler says to herself that makes it okay to steal. Some embezzlers justify their actions by convincing themselves that they are being mistreated by their employer and deserve the stolen funds. Others steal because they rationalize that the consequences of stealing are better than the consequences of not stealing. No one, however, counts on getting caught. Ms. Duncan used the funds she stole to feed her addiction and didn’t appear to be motivated by retaliation. She was contrite in her confession and sentencing. I do not know, how she justified to herself the theft of these funds.
In addition to spending time in prison, and having to pay restitution, Ms. Duncan will carry the burden of being a convicted felon for the rest of her life. No one but her knows the effect this will have on her children. The HASC will likely never recoup all of the stolen funds. In comparison, mentioning lessons learned and the importance of controls seems trivial. There may be no silver lining.