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Writer's pictureJoe Carter

Pressure + Rationalization + Opportunity = High Risk of Fraud

Updated: Feb 3, 2022

Some time back I attended a conference and learned about the practical application of a framework called The Fraud Triangle, which is utilized to spot potential high-risk fraud situations in companies. I applied what I learned at this conference to become more aware of potential high-risk fraud situations that I might encounter. At the conference mentioned above I learned about the The Fraud Triangle framework from Neil Weinberg (https://www.linkedin.com/in/neilweinberg/), who was one of the keynote speakers. Neil Weinberg co-authored a book with Walter Pavlo, Jr., called, Stolen Without A Gun (displayed on the picture for this post). In this book they describe how Pavlo,. a "newly-minted MBA arrives at telecom giant MCI Communications in Atlanta to start his career as a finance executive." The book goes on to describe how Pavlo "consorts with a rogue MCI customer in a scheme to siphon $6 million of company cash to the Cayman Islands. Stolen Without A Gun is a unique look into the dark shadows of corporate corruption and white-collar crime." Neil Weinberg's presentation at the conference was focused on the relationship he developed with Walter Pavlo, Jr and on how Pavlo came to commit his crime. The link to the 10-minute video below provides you with an overview of Pavlo's crime and the consequence he paid as a result (https://www.youtube.com/watch?v=sPUuHn5_L1g).


In the video above, Pavlo comments that, “All of us are perfectly capable of committing the perfect crime.” In the executive workshops and graduate-level courses that I teach we watch the video and then I ask the participants if they agree with Pavlo's assertion that even they are capable of committing the perfect crime. The reaction is about 50/50 as to whether they agree / disagree. Actually, some of them are adamant that they would never even think of committing fraud.


We then discuss how easy it might be for all of us to go down a path that leads to committing fraud. To demonstrate this point, I share with them an example of how a manager might intentionally mis-allocate costs to conceal an under performing business. For example, a manager might transfer or allocate costs from Business "A" to the costs of Business "B" because Business "A's" costs are over-budget causing them to underperform from a profit margin perspective. Now why might the manager want to conceal the fact that they are not meeting the profit margin targets? Well, it could be that the manager and others are rewarded with a bonus (PRESSURE) if Business "A" performs at certain level of profitability. The manager might also convince themselves that there is nothing wrong with transferring the costs because it all goes to the ends up on the same income statement (RATIONALIZATION). The manager might also think no one will find out if the costs are transferred from Business "A" to Business "B" (OPPORTUNITY). I then ask them if they had ever done anything like this before, or were aware that someone had done something similar and from the reactions I received I would say more . They just did not did not recognize what they did was fraud and they were not aware of how they were allowing themselves to be influenced by the three components of The Fraud Triangle.


Think for a minute. Are you aware of any recent or current situations where the framework of The Fraud Triangle would identify some very high-risk fraud situations? I would be surprised if you weren't aware of any. How might the application of Critical Thinking Skills mitigate the risk of fraud occurring in this situation?


Here is a link to an article about Critical Thinking. https://www.inclineinsights.com/post/critical-thinking


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