Question

What are the three elements of the fraud triangle, and how can an employer minimize the perceived pressures on the employee so as to prevent fraud?

Answer 1

What is the Fraud Triangle?

The Fraud Triangle is a model developed by Dr. Donald Cressey, a criminologist whose research focused on embezzlers. According to Dr. Cressey, there are three factors that must be present in order for an ordinary person to commit fraud. All three of these factors must be present at the same time in order for fraud to occur:

• Opportunity
• Pressure
• Rationalization

Opportunity

One leg of the fraud triangle is opportunity. The person must see some way she can abuse his or her position of trust to solve her financial problem with a low perceived risk of getting caught. This is the one angle of the Fraud Triangle that employers can control.

When the opportunity for fraud is prevented from occurring, those losses can be avoided and time and effort can be saved in trying to reconstruct fraudulent transactions, track down the embezzler and reclaim missing funds. One of the most cost effective ways to stop fraud from occurring is by conducting a professional pre-employment background screen. By hiring an experienced employee background hiring a firm such as Accu-Screen, Inc., the following issues can be discovered to help deter potential problem employees:

• Serious personal financial problems
• Criminal history
• Unstable employment history

Pressure

Another leg of the fraud triangle represents pressure. This is what Dr. Cressey called a perceived non-sharable financial need. This is what motivates the crime in the first place. The fraudster has some financial problem that he is unable to solve through legitimate means:

• Unable to pay personal bills
• Desire for luxury items
• Drug, alcohol or gambling addiction

Rationalization

The third leg of the fraud triangle is rationalization. Embezzlers do not view themselves as criminals. They see themselves as ordinary, honest people who are caught in a bad set of circumstances.

How to prevent fraud

The key to dealing with fraud is to focus on prevention. It is cheaper and more effective to prevent fraud from happening than it is to try to detect the crime. By the time the fraud is discovered, the money is gone and chances are slim to none that it will be recovered. Additionally, it is costly and time consuming to investigate a fraud.

Perhaps the most important lesson of the fraud triangle is that all three factors must normally be present for fraud to occur. If any one of the three elements is missing, fraud may not occur.

The key to dealing with fraud is to focus on the prevention of opportunity. It is much less expensive and more effective to prevent fraud from happening than it is to try to detect the crime.