Breaking Bad & the Fraud Triangle

In my recent blog post on what Olympic swimming can teach us about fraud prevention, I discussed the fraud triangle, i.e., the theory that—for a fraud to occur—three elements must be present:

  1. A perceived need or financial pressure facing an individual
  2. A perceived opportunity to commit fraud
  3. The individual’s ability to rationalize or justify fraudulent behavior

Last weekend, I caught parts of a “Breaking Bad” marathon. For those who aren’t familiar, it tells the story of Walter White, a chemistry teacher diagnosed with terminal cancer who has a pregnant wife, teenage son and virtually no savings to support his family when he’s gone. After witnessing a drug bust, he becomes involved in cooking and dealing methamphetamine to meet these financial challenges. The show is a fraud triangle case study.

Walter’s situation is a good example of an individual with a “perceived financial need or pressure.” He’s able to rationalize his actions despite their negative consequences. In his mind, he’s simply doing what he must to provide for his family.

Walter perceives an opportunity to commit fraud by engaging in the drug underworld through a former student who provides him with an opportunity to commit his crime, and the fraud triangle is completed.

How can employers use Breaking Bad as a cautionary tale to assist their fraud prevention efforts? Walter has limited financial resources to provide for his family. Companies cannot plan and provide for every financial contingency employees may face. If a company is paying a fair salary and benefits, it’s done about as much as it can to assist employees with their financial obligations. As a result, this side of the fraud triangle doesn’t offer much in the way of fraud prevention opportunities.

What about rationalization? Can’t organizations offer continuing education in the areas of individual and business ethics to help employees identify and resolve these inner dilemmas? Yes, but their effectiveness varies. In fact, some studies suggest an individual’s personality is largely set by the time they enter first grade. Unless companies want to start recruiting at a really early age, this side of the fraud triangle doesn’t offer much in the way of fraud prevention opportunities either.

That brings us to the final leg of the fraud triangle—perceived opportunity. Despite Walter’s ethical limitations and nonexistent financial means, perhaps he wouldn’t have become involved with the seedy enterprise if he hadn’t witnessed the drug bust.

Opportunity is where organizations can have the biggest impact on fraud prevention. First, they must “set the tone at the top” with executive management embracing and communicating intolerance for fraudulent actions and behavior. The organization also must perform a meaningful and realistic review of its internal controls to identify and strengthen risk areas. Doing so can help increase the likelihood that an employee’s fraudulent behavior will be quickly identified or—better yet—completely deterred.

Finally, organizations must demonstrate the consequences of dishonest and fraudulent behavior. Too often, when faced with an employee who has abused their position of trust and engaged in fraudulent behavior, the organization chooses to look the other way and allow the employee to remain in their position. In these situations, it’s not a question of if the employee will engage in future fraudulent behavior, but when. If the organization chooses a more severe response, it’s often to terminate the employee without pursuing any type of legal action; by choosing this, the organization has made the employee someone else’s problem.

What if Walter’s first exposure to the drug underworld was a reminder of how criminals are punished? His perspective would probably be different. When he observed the meth lab bust, the consequences of becoming involved in the drug trade might have outweighed the possible benefits. In the business world, this represents the best possible outcome:  preventing fraudulent behavior from ever occurring.

avatar

Rand provides business valuation services, forensic accounting, economic damage analysis, fraud auditing and bankruptcy and restructuring services, including serving as an expert witness. He also performs valuations for transactions and restructurings and economic analyses of damage resulting from business interruption and breach of contract.

Rand Gambrell – who has written posts on BKD Forensics.


Tagged on: ,

Leave a Reply

Your email address will not be published. Required fields are marked *