In the previous blog about fraud, we discussed why people commit fraud. The question of why fraud happens delves into the intricate web of human psychology, financial pressures, and the allure of gain. From the allure of financial gain to the pressures of modern life, understanding the underlying reasons behind fraud is crucial in developing effective strategies to prevent and combat this pervasive issue. In this exploration, we unravel the motivations that drive individuals to breach ethical boundaries and engage in fraudulent behavior.
In this blog, the subject is the Fraud Triangle, a key framework in the world of fraud in helping us understand why fraud happens.
Understanding the Fraud Triangle: A Key Framework in the World of Fraud
When it comes to understanding why fraud occurs, the “Fraud Triangle” is an essential concept. Developed by criminologist Donald Cressey, this model explains the three factors that, when combined, lead an individual to commit fraud. In this article, we’ll explore each of these factors—Pressure, Opportunity, and Rationalization—with real-life examples to help illustrate how the Fraud Triangle operates in practice.
Pressure, often financial in nature, is the initial factor in the Fraud Triangle. It acts as the motivator or the driving force behind the fraudulent behavior. This pressure can come from various sources, such as:
- Personal Financial Stress: An individual might be facing personal debt, medical bills, or an addiction, leading them to see fraud as a way out. Consider a sales manager who is under pressure to meet personal debts. They might inflate sales figures to earn higher commissions, justifying it to pay off their debts.
- Workplace Pressure: Employees might be under immense pressure to meet financial targets or performance goals, pushing them towards fraudulent activities. A financial analyst at a corporation could feel pressured to manipulate financial reports to make the company appear more profitable, thereby securing their job or a potential promotion.
Opportunity is the second factor in the Fraud Triangle. It represents how someone can commit fraud without getting caught. These can be:
- Lack of Oversight: When there is inadequate supervision or weak internal controls, employees may find opportunities to commit fraud. A payroll clerk might notice a lack of oversight in their department and start embezzling funds by creating fake employee records and funneling salaries to their account.
- Access to Information: Having access to confidential information also creates opportunities for fraud. An IT professional with access to sensitive customer data might engage in identity theft, using the information to apply for credit cards or loans in the names of customers.
Rationalization is the third factor, where the individual justifies their fraudulent actions. It’s a coping mechanism that allows the fraudster to view their actions as acceptable or unavoidable.
- Justifying as a Loan: The fraudster might rationalize their actions by thinking they will repay the stolen money once their financial situation improves. An employee embezzling company funds might justify it as a temporary loan they intend to pay back eventually.
- Feeling Underappreciated: They might feel they deserve more than what they are getting, rationalizing fraud as a way of getting their fair share. An executive who feels underpaid might justify padding their expense reports because they believe they deserve more for their hard work.
The Fraud Triangle is a powerful tool for understanding the mindset and circumstances that lead to fraudulent activities. By recognizing these factors in various settings, organizations can develop more effective strategies for fraud prevention and risk management. Remember, it’s the combination of Pressure, Opportunity, and Rationalization that makes the perfect breeding ground for fraud, and addressing these aspects can significantly mitigate the risk.
Dieudonne (Neetje) van der Veen is a financial and management business advisor. His work and experience are mainly in the field of financial management and structuring of companies in distress and Governance on Planning & Control cycles.
Mr. van der Veen has a master’s degree in business economics (Erasmus University Rotterdam), is a Registered Accountant (Royal Dutch Professional Organization of Accountants), CFE (Certified Fraud Examiner) and CICA (Certified Internal Control Auditor).
Mr. van der Veen writes articles about Governance and Fraud, and actively contributes to the ACFE-DCC community for knowledge-sharing.
