Question

Can the elements of the Fraud Triangle be observed?

Let's explore this idea by responding to each of the following:

• "An organization with significant fraud risk looks and sounds like"
• "An organization with minimal fraud risk looks and sounds like"

Answer 1

Fraud Triangle definition

The Fraud triangle is a framework designed to explain the reasoning behind a worker’s decision to commit workplace fraud. The three stages, categorised by the effect on the individual, can be summarised as pressure, opportunity and rationalisation.

• Step 1 – the pressure on the individual – is the motivation behind the crime and can be either personal financial pressure, such as debt problems, or workplace debt problems, such as a shortfall in revenue. The pressure is seen by the individual as unsolvable by orthodox, legal, sanctioned routes and unshareable with others who may be able to offer assistance. A common example of a perceived unshareable financial problem is gambling debt. Maintenance of a lifestyle is another common example.
• Step 2 – the opportunity to commit fraud – is the means by which the individual will defraud the organisation. In this stage the worker sees a clear course of action by which they can abuse their position to solve the perceived unshareable financial problem in a way that – again, perceived by them – is unlikely to be discovered. In many cases the ability to solve the problem in secret is key to the perception of a viable opportunity.
• Step 3 – the ability rationalise the crime – is the final stage in the fraud triangle. This is a cognitive stage and requires the fraudster to be able to justify the crime in a way that is acceptable to his or her internal moral compass. Most fraudsters are first-time criminals and do not see themselves as criminals, but rather a victim of circumstance. Rationalisations are often based on external factors, such as a need to take care of a family, or a dishonest employer which is seen to minimise or mitigate the harm done by the crime.

The three key elements in the fraud triangle are opportunity, motivation, and rationalization. Opportunity is the element over which business owners have the most control. Limiting opportunities for fraud is one way a company can reduce it.

The opportunity to commit fraud is possible when employees have access to assets and information that allows them to both commit and conceal fraud. Employees are given access to records and valuables in the ordinary course of their jobs. Unfortunately, that access allows people to commit fraud. Over the years, managers have become responsible for a wider range of employees and functions. This has led to more access for them, as well as more control over functional areas of companies. Access must be limited to only those systems, information, and assets that are truly necessary for an employee to complete his or her job.

Motivation, another aspect of the fraud triangle, is a pressure or a “need” felt by the person who commits fraud. It might be a real financial or other type of need, such as high medical bills or debts. Or it could be a perceived financial need, such as a person who has a desire for material goods but not the means to get them.

Motivators can also be nonfinancial. There may be high pressure for good results at work or a need to cover up someone’s poor performance. Addictions such as gambling and drugs may also motivate someone to commit fraud.

Lastly, employees may rationalize this behavior by determining that committing fraud is OK for a variety of reasons. For those who are generally dishonest, it’s probably easier to rationalize a fraud. For those with higher moral standards, it’s probably not so easy. They have to convince themselves that fraud is OK with “excuses” for their behavior.

Common rationalizations include making up for being underpaid or replacing a bonus that was deserved but not received. A thief may convince himself that he is just “borrowing” money from the company and will pay it back one day. Some embezzlers tell themselves that the company doesn’t need the money or won’t miss the assets. Others believe that the company “deserves” to have money stolen because of bad acts against employees.

Business owners and executives must take control of fraud by working on the portion of the fraud triangle over which they have the most control: the opportunity to commit fraud. It may be difficult for management to do anything about an employee’s needs or rationalizations, but by limiting opportunities for fraud, the company can reduce it to some extent.