Question

Identify the 3 elements of the fraud triangle and explain how they work. Also, using the internet provide an example of fraud discovered by external auditors and try to identify the red flags related to the fraud.

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. The elements are as follows:

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 un-shareable with others who may be able to offer assistance. A common example of a perceived un-shareable financial problem is gambling debt. Maintenance of a lifestyle is another common example.

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 un-shareable 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.

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.