Business Ethics during a Crisis (Fraud Triangle)

It has been a crazy week. Last Friday, the President of the United States issued a national emergency over the Coronavirus Pandemic. The entire world has been in chaos for a week. It think it is important that in all this craziness, we take a pause and talk about ethics.

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VIDEO SUMMARY

There is a concept in ethics that I have not talked about before, but is very important. It is called the Fraud Triangle. And I think this is particularly important with what is going on in the world today.

There has been a lot of accounting research on fraud. Why does fraud happen in a business? People have looked at many different cases of fraud, and came up with three factors that are usually present when fraud happens. These three factors make up the fraud triangle.

• Pressure. This could be pressure from personal financial distress or addiction, it could be work pressure to meet unrealistic performance measures, or it could be external pressure to meet credit ratings.
• Opportunity. This is weak internal controls that make it easy to commit fraud.
• Rationalization. An unethical environment where people rationalize it is “ok” to commit fraud. This can happen when an environment seems unfair or when performance is prioritized above ethics.

Fraud is like a plant that grows. And it will grow when you have the right environment that contains these factors from the fraud triangle.

Why is this relevant today? Today we are all under tremendous amounts of pressure. In this week alone, I know so many people who have lost their jobs. Some projections of unemployment in the United States could reach 20%.

When you are in an environment of high pressure, you become more incentivized to take shorts cuts, and bend the rules, and do things that are unethical and wrong to get what you want.

One thing I would encourage all of you is to recognize when you are under a lot of pressure. When you realize this, a red flag should go off in your mind that this is one of the three factors of the fraud triangle. This is your signal to become very aware of the actions you are taking. You should be taking a really hard look at what is going on and asking the question “Am I doing the right thing?”

As we move forward together through this difficult time, just remember that the actions you take over the next 30 days under high pressure will define your character and your ethics.

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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.