Developed by criminologist Donald Cressey, the Fraud Triangle provides a framework to understand the factors that lead individuals to commit fraudulent acts.
In the world of forensic accounting and criminology, one theory stands out as a reliable tool for understanding why people commit fraud. It’s known as the Fraud Triangle.
Whether it is occupational fraud or some other form of fraudulent activity committed for personal gain, the Fraud Triangle outlines why people commit fraud.
What Is the Fraud Triangle?
The Fraud Triangle consists of three components that are typically present when fraud occurs: pressure, perceived opportunity, and rationalization. Let’s examine each component in detail so that you can get a better understanding of why fraud committers act.
The first point of the Fraud Triangle is pressure. This refers to the personal or financial pressure that motivates an individual to commit fraud. The pressure could arise from various sources, such as mounting debts, unexpected financial emergencies, addiction issues, or the desire to maintain a certain lifestyle.
It’s important to note that this pressure is often hidden from others, making it difficult to detect. While the pressures leading to fraud are often financial – a large debt, an unexpected expense, or a costly addiction – they can also be non-financial.
For instance, someone might feel pressure to meet certain performance targets or to maintain a particular social status. These pressures can create a sense of desperation, pushing individuals towards fraudulent activities as a perceived solution. Organizations must understand these potential pressures and consider them when devising strategies to deter fraud.
The second component is opportunity. This refers to the circumstances that allow fraud to occur. It could be poor internal control, lack of supervision, or access to sensitive information, like financial statements or valuable assets. When these opportunities are present, and the individual believes their fraudulent actions can go undetected, they are more likely to commit fraud.
Opportunities for fraud can arise from various organizational weaknesses. For example, a lack of checks and balances, inadequate security measures, or an overly trusting environment can present opportunities for fraudulent behavior.
Interestingly, in many cases, the individual committing fraud is often in a position of trust and has been with the organization for a long time. This underscores the importance of not only implementing rigorous controls but also regularly reviewing and updating these measures to close any gaps that may offer opportunities for fraud.
The final point of the Fraud Triangle is rationalization. This is the process by which individuals justify their fraudulent behavior to themselves. They might convince themselves that they’re only “borrowing” the money and intend to pay it back, or they may feel they’re justified due to being underpaid or undervalued at work.
Regardless of the reasoning, this rationalization allows them to commit fraud without feeling guilty or seeing themselves as criminals. Rationalization is perhaps the most subjective and complex component of the Fraud Triangle.
The process of rationalizing fraud is deeply personal and can be influenced by an individual’s moral compass, personal beliefs, and past experiences. Some may rationalize their actions as a form of retribution against an employer they perceive as unfair or uncaring.
Others might convince themselves that their actions are harmless if they don’t directly harm anyone. By fostering a culture of transparency, fairness, and accountability, organizations can challenge these rationalizations and reinforce the message that fraudulent behavior is both morally wrong and damaging to the entire organization.
Understanding and Preventing Fraud
Understanding the Fraud Triangle provides valuable insights for businesses looking to prevent fraudulent behavior. By recognizing and addressing each component, companies can significantly reduce the likelihood of fraud occurring.
In terms of pressure, businesses can foster an open and supportive workplace environment where employees feel comfortable discussing personal issues or financial stresses. Employee assistance programs can also be implemented to help employees deal with personal issues that may cause them to feel pressured.
To limit opportunities for fraud, companies should establish robust internal controls such as segregation of duties, regular audits, and stringent access controls to sensitive information and assets.
Lastly, to combat rationalization, companies can promote a strong ethical culture that communicates that fraudulent behavior is unacceptable. Regular ethics training can also help employees understand the consequences of fraud and the importance of ethical behavior.
The Fraud Triangle is a powerful tool for understanding and preventing fraud. By recognizing the components of pressure, opportunity, and rationalization, businesses can take proactive steps to create an environment that discourages fraudulent behavior.
While it’s impossible to eliminate all instances of fraud, understanding the Fraud Triangle can significantly reduce its prevalence in your organization.
If you want to learn more about why people commit fraud, the Fraud Triangle, mediation, alternative dispute resolution, or negotiation tactics, contact ADR Times for educational courses and training materials.