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 grant fraud?
Solving the mystery of “The Fraud Triangle” was led by criminologist Dr. Donald Cressey and is based on his well-accepted behavioral research model studying embezzlers.
3 Key Factors in Grant Fraud
According to Dr. Cressey, all three factors must be present in order for the crime of fraud to occur:
- Perceived Pressure
Let’s look at each of these and the role they play in how federal funds can be lost to fraud.
Fraud Factor #1: Opportunity
The term “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.
In other words, I think I can get away with it and either no one will notice, or I can cover my tracks.
Fraud Factor #2: Pressure
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 such as:
- Financial problems
- Substance abuse
- Gambling or shopping addictions
It can also be thought of as the “incentive” for fraud.
Pressure to commit fraud can financial or non-financial in nature.
Fraud Factor #3: Rationalization
Rationalization 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 Fight 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 that fraud can occur.
Two Purposes of Strong Internal Controls:
There are two main purposes of strong internal controls.
Purpose #1: Prevent Fraud
Prevention centers around stopping the opportunity for grant fraud to take place–even when “perceived pressure” and “rationalization” are present.
This includes internal control components such as control activities like established practices and policies, and risk assessments that look for what could go wrong.
Purpose #2: Detect Fraud
One of the ways to minimize the disaster of grant fraud is to detect it quickly.
Strong internal controls should help you discover when grant fraud is happening in a timely fashion.
So, strong internal controls don’t just prevent fraud; they must also include ways to detect it.
People are creative problem-solvers and sometimes in a “bad” way Mystery of the Grant.
The key component of internal controls that detect fraud is active monitoring and testing that your internal controls are really working as you intended.
What is Your Plan to Fight Grant Fraud?
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 Mystery of the Grant.
Does your organization have a plan for avoiding and detecting fraud?
If so, do the rest of the employees know what it is?
Many organizations put policies and procedures in place, only to miss the internal control component of communication.
Encouraging good communication on all levels of the organization is one more way that your organization can fight fraud.
Often when grant fraud is discovered, employees have suspected or known “something” seemed wrong for quite some time.
Have the “what to do” conversation now.
Make sure employees know what to do if they suspect grant fraud.
Ready to Improve Your Grant Management?
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Would you like to be a better grant manager?
We have another grant management training seminar coming soon.
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Hope to see you there!
Lucy Morgan CPA, MBA
CEO, Compliance Warrior
Author of “Decoding Grant Management-The Ultimate Success Guide to the Federal Grant Regulations in 2 CFR Part 200” The 2nd Edition is now available on Amazon in Paperback and Kindle versions.