The Fraud Diamond in Action

The Fraud Triangle, an industry standard when it comes to explaining how fraud schemes are perpetuated, has a new companion – the Fraud Diamond. The diamond adds a fourth point to the picture – in addition to the elements of incentive, opportunity, and rationalization we find a fourth:  the person’s ability/skill level. Intuitively, it would seem a natural assumption that in order to pull off a fraud scheme, the person must have certain skills like financial knowledge, ability to handle stress, or familiarity with computer programs.  While the diamond is not currently the industry standard, it is an interesting concept to consider during fraud investigations.

Examining a specific fraud scheme will help illustrate, in general terms, the fraud diamond concept.  When evaluating an organization’s internal control structure, monitoring exposure to risk-of-loss, or investigating fraud, keep in mind the knowledge, skills and abilities of those individuals with access, since they are the ones who may perpetrate fraud schemes.

Theoretical Case Study: The Overqualified Bank Teller

A bank teller working for a branch of a national bank is often bored at work. He is a smart young man who feels overqualified for his job and he completes his tasks quickly. He has a lot of time to think and his mind wanders to ins and outs of the banking industry. He thinks he spots loopholes where the bank could make improvements in security, but instead of offering suggestions he decides to test his theory to see if he could beat the bank’s systems. It is simply the thought of, “I think I can do this, so I am going to try.” His incentive is merely the challenge of beating the system, not necessarily the overt decision to commit fraud.

He notices that there are very small amounts of money – a fraction of a penny up to one penny – that are rounded off on transactions. The customer never notices or comments on these small amounts being rounded off. He sees an opportunity in the weakness of the bank’s system. He could accumulate these fractions of a cent, and over time they could become a large sum.

He opens up a fictional account and develops a computerized system to move the fractions of a cent into that account for all the customers he works with during the day. In his mind he isn’t stealing from the customers because they don’t realize the rounding is occurring anyway, and plus, the bank itself is insured by the FDIC. His rationale is that since everyone is protected, no one gets hurt. He is watching this bank account increase day by day for months at a time.  The scheme is worth the risk in the end because he is proving that he is smart enough to work the program, plus he is not getting caught.

The bank teller’s capabilities tie directly into his incentive in this case – he just wanted to see if he could pull off the scam against the bank and if he had the skills needed to make it happen. Once he found out that he did in fact have these abilities, the accomplishment wasn’t enough. Now it was about staying calm and collected while his bank account’s balance increased – could he pull that off? The risk was not enough to make him stop because he was testing his abilities yet again.  A person who commits fraud often has an overactive ego that lets him believe he is above being caught and has figured out the system to his benefit. Ultimately, his personality traits and his technical skills with the computer were the skills required to execute this particular fraud scheme.

Did the skills lead to the fraud? Is the fraud diamond on its way to being the new standard in fraud investigations? That has yet to be determined, but it is safe to say that knowledge, skills and abilities are definitely part of the overall picture.  Consulting with a Certified Fraud Examiner might be the best way to increase your awareness of the risks specific employees may bring to your organization.

Mike Rosten is a Principal at Piercy Bowler Taylor & Kern CPAs and Business Advisors. You can reach him at mrosten@pbtk.com.

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