Fraud Diamond

Applying Resiliency in Reducing Fraud

The fraud diamond has been around for some time and provides a good guidance to organizations desirous of understanding the various channels that can initiate a fraud. The following figure is an illustration of the well known fraud diamond:

 

Fraud Diamond

Incentive: Reasons that can cause an employee to steal from a company, such as personal debts, greed, drug abuse, etc. From a management perspective, the CEO has full power in running the organization thereby resulting in actions being undertaken without being questioned.

Opportunity: Weak controls proving an avenue for the staff member to commit fraud. From a management perspective, ineffective monitoring allowing for less oversight of managements duties thereby providing an avenue to commit fraud.

Rationalization: Providing a justification or explanation as to why the action was committed. From a staff member perspective, there is the feeling that he/she is not properly compensated and a little theft of fraud will level the playing field. From a management perspective, because of the level of authority in the organization, there is no bother to even provide an explanation of the fraudulent actions undertaken.

Capability: Knowledge of systems and the ability to manipulate others. From a staff member perspective, being the only person highly knowledgeable about a key financial system for example and knowing that tracing all activity can be easily altered is a good avenue for fraudulent actions to take place. From a management perspective, the ability to use financial systems to inappropriately manipulate numbers is also a good example of capability.

When looking at these four channels of fraud, the question can be asked as to what then can be put in place to guide an organization into strengthening its resilience in dealing with this? Let’s look firstly at how implementing controls and procedures can improve an organization’s resilience when it comes to managing fraud and then incorporating these into the fraud diamond. Since diamond is regarded as one of the hardest material on the planet and resilience is associated with toughness these two therefore go hand in hand.

 

Incentive: Reasons that can cause an employee to steal from a company, such as personal debts, greed, drug abuse, etc. From a management perspective, the CEO has full power in running the organization thereby resulting in actions being undertaken without being questioned.

Resilience: Apart from conducting background checks prior to hiring, organizations should routinely monitor staff’s behavior looking for any warning signs that can be an incentive to perpetrate fraud. An organization’s board should also employ a code of conduct to guide the entire staffing population (including senior management) on practicing ethical behavior.

 

Opportunity: Weak controls proving an avenue for the staff member to commit fraud. From a management perspective, ineffective monitoring allowing for less oversight of managements duties thereby providing an avenue to commit fraud.

Resilience: The organization should employ procedures practices to detect such activities thereby improving resilience. A maker/checker or four eyes is an example of an approach that can be applied.

 

Rationalization: Providing a justification or explanation as to why the action was committed. From a staff member perspective, there is the feeling that he/she is not properly compensated and a little theft of fraud will level the playing field. From a management perspective, because of the level of authority in the organization, there is no bother to even provide an explanation of the fraudulent actions undertaken.

Resilience: Controls to monitor inventory intake/outtake and regular auditing.

Capability: Knowledge of systems and the ability to manipulate others. From a staff member perspective, being the only person highly knowledgeable about a key financial system for example and knowing that tracing all activity can be easily altered is a good avenue for fraudulent actions to take place. From a management perspective, the ability to use financial systems to inappropriately manipulate numbers is also a good example of capability.

Resilience: Knowledge transfer is critical to ensuring resiliency. Also, critical financial system logs must not be easily modified and access must be done through the use of high level permission only.

Now, as demonstrated, controls and procedures can be put in place to improve an organization’s resilience when it comes to addressing fraud. The following figure therefore shows the incorporation of resilience into the fraud diamond and provides a more idea generating approach to organizations looking to addressing fraud related activities.

 

Fraud Diamond with Resilience

 

Including resilience in the fraud diamond provides a better understanding of how each of the four channels of fraud can be managed. In its simplest definition, Resilience is the “capacity to recover quickly from difficulties; toughness” (Google). Therefore, understanding how resilience can fit in to each of these channels can provide organizations with a better approach in reducing fraud

Advertisements