Grant Fraud is a mystery to many of us. How can it happen? Why would someone do it? And more importantly, how can federal grant recipients avoid it?
Solving the mystery of “The Fraud Triangle” was led by criminologist Dr. Donald Cressey and is based on his well-accepted behavioral reserch model studying embezzlers.
3 sides to grant fraud
According to his model all three factors must be present in order for the crime of fraud to occur.
#2) Perceived Pressure
Let’s look at each of these.
#1) Opportunity-What’s missing?
Opportunity simply means that it is perceived that a control or procedure that should be in place is not present, or that existing controls and procedures are not adequate.
#2) Perceived Pressure-But I need it!
Perceived pressure is the “need” to commit fraud. In other words it is the pressure experienced by an individual or organization that motivates them to commit fraud. It can also be thought of as the “incentive” for fraud. Pressure can financial or non-financial in nature.
#3) Rationalization-Excuse me!
This is the “train of thought” or “excuse” that allows an individual or organization to “justify” the fraud. While an individual’s or organization’s general sense of values affects the ability to rationalize unethical or criminal behavior, perceptions of “fairness”, “revenge”, and “punishment” also play into the ability to justify fraud.
What can an organization do to avoid grant fraud?
Of all the three elements of the “Fraud Triangle“, organizations have the most control over opportunity. Having strong internal controls and procedures in place significantly reduces the risk for fraud to occur.
Two purposes of strong internal controls:
It comes down to this: There are two main purposes of strong internal controls.
Prevent fraud: Stop the opportunity for grant fraud to take place–even when “perceived pressure” and “rationalization” are present.
Detect fraud: Find out quickly when grant fraud is happening. Strong internal controls don’t just prevent fraud; they must also include ways to detect it.
People are creative problem-solvers and sometime in a “bad” way. Monitor and test that your internal controls are really working as you intended.
What is your plan?
Grant fraud negatively affects not only the organizations involved, but also the people they serve and the perception of taxpayers who become suspicious of continued funding of all federal grants.
Does your organization have a plan for avoiding and detecting fraud? If so, do the rest of the employees know what it is?
Often when grant fraud is discovered, employees have suspected or known “something” seemed wrong for quite some time. Have the conversation now. Make sure employees know what to do if they suspect grant fraud.
Lucy Morgan CPA, MBA
CEO, Compliance Warrior