On Your Honor?

Earlier today, I ran the NYC half marathon. It is an amazing race that involves some of the best aspects of Manhattan. We begin by running around Central Park, a route that takes us past famous (and maybe just famous to runners) landmarks such as Strawberry Fields, the Boathouse and Cat Hill. We then exit the Park at Seventh Avenue and run through Times Square all the way to 42nd Street. This is the third time that I have run this race and running through Times Square still excites and thrills me. I run down the middle of the street, relishing the lack of traffic and feeling as though I am running away from zombies in a post-apocalyptic time. We hang a right at 42nd and head out to the West Side Highway. We race all the way down the West Side Highway and the race ends at South Street Seaport. However cold and painful the run may be, the route is an amazing and beautiful one and always well worth running. That said, throughout the race, as I took in the sights and sounds, I also noticed another thing. Security.

There are many measures that the New York Road Runners Association takes to keep runners honest. When I went to collect my bib and tracking tag, I needed to present identification as proof that I was who I claimed to be. During the race, there were several points on the course where the data on our trackers was collected. This data was collected as a safeguard against cheating by, say, taking a train or cab over a section of the race. There were also various marshals and police officers along the route keeping track of runners and supporters. I came home and I read about ex-white collar criminal, Amy Wilson. I thought about how curious it was that a running race had so many controls to minimize the risk of cheating, but the company where Wilson worked had very few controls to protect its assets.

One way to help protect a company’s assets is to recognize the fraud triangle and institute measures to break the cycle. In the story of Amy Wilson, all three aspects of this triangle are apparent. Initially, her son was arrested and jailed. Ms. Wilson felt under pressure to save her son and did not feel she could turn to anyone for this help. She decided she needed money to hire a lawyer, money that she did not have. Because controls over the financial systems were weak, she had the opportunity to write fake checks. Even after she helped her son out with his legal issues, Wilson continued to steal from her company. She rationalized her crime by working long hours and by telling herself that she was merely “borrowing” the funds from the company.

The most direct way for a company to break the triangle is to install appropriate and adequate controls in their financial system. An important one is the separation of duties. An example of the separation of duties is to have one person approve payments and another reconcile financial records. Another control is the review of financial ratios and the investigation of variances. There are more and a financial expert can recommend some that are both effective and economical for the company concerned.

Even if a company hires the best people in the world, working on the honor system is not a smart approach to business. One can never know when an employee will have a financial problem and feel pressured to try to come by finances that they do not have. It is smart to take away the opportunity for the employee to act on this pressure. Perhaps, instead, the employee, without the opportunity to commit fraud, will seek more honest resolutions to his or her problem.

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10 thoughts on “On Your Honor?

  1. […] have written before about the fraud triangle and how the three elements, pressure, opportunity and rationalization, tend to be the factors that […]

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  2. […] accountants and that very little has changed since then. It is a great reminder of how important having a good financial control system is. In our mostly virtual and paperless modern transactions, people tend to think less about how a […]

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  3. […] with the anti-bribery laws. The controls are so that the employees of the corporation do have the opportunity to commit fraud or bribery. When companies and individuals are paying bribes to public officials, […]

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  4. […] story of Rita Crundwell and her crime is a great illustration of the working of the fraud triangle. Her family had been involved in the horse breeding and showing business, she had grown up on their […]

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  5. […] Postal Inspection Service and headed by Postal Inspector Melissa Atkin. True to the elements of the fraud triangle, Haber claimed that he started defrauding Grant Thornton because of financial pressure and, as you […]

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  6. […] last year, I wrote about Amy Wilson and the lack of controls that existed in the company that she stole from. The complete lack of […]

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  7. […] my first post about Amy Wilson, I discussed how many controls I come across when I run a race compared to how few controls I have […]

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  8. Very soon this site will be famous among all blogging and site-building viewers, due to it’s nice posts

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  9. […] whatever he wanted without anyone really questioning what was going on. He knew that he now had the OPPORTUNITY to defraud his employer and he took advantage of this opportunity. True to the trend, Christopher […]

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  10. […] we talk about fraud and how it tends to happen, the classic fraud triangle is most commonly used to help us understand how it all happens. The sides of this triangle […]

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