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The Fraud Triangle: Factors to Explain Fraud

byLowers & Associates | March 21, 2013

The first question on the mind of business owners, executives, and managers whose organizations have been victimized by fraud is how. Understanding the factors that cause an individual to commit an act of fraud can help companies avoid becoming repeat victims and put systems in place to prevent such acts from occurring.

Occupational fraud is defined as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” Occupational fraud schemes are clandestine. They violate the perpetrator’s fiduciary duties to the victim organization. They are committed for the purpose of benefiting the perpetrator. And they cost victim organizations assets, revenue, and/or reserves. In fact, U.S. companies will lose 5% of their annual revenue to occupational fraud this year.

For good reason, prevention of occupational fraud is at the center of enterprise risk management strategies.

The Fraud Triangle is a commonly-referenced model for explaining the factors present when fraud occurs within an organization.

Why Do People Commit Fraud?

The Fraud Triangle model, developed by famed criminologist Donald R. Cressey, is useful in understanding the circumstances and rationale behind occupational fraud. How can the damaging acts of an employee be explained?  Let’s look at each factor:

1. Opportunity

The hard fact is that opportunity can sway even otherwise honest individuals in cases of fraud. When it comes to opportunity, potential fraudsters identify an opportunity to use/abuse their position of trust for personal gain and they believe they have a low risk of getting caught in the act. Weak internal controls, poor security, low likelihood of detection, and lack of policy enforcement provide clear opportunities for a fraud to be perpetrated.

2. Incentive / Motivation

Need and greed are common incentives for committing fraud. When coupled with opportunity, the temptation can be all too great for some. Management or other employees may have an incentive or be under pressure, providing a motivation to commit fraud.  According to the ACFE common pressures that lead to fraud include:

  • Inability to pay one’s bills
  • Drug or gambling addition
  • Need to meet earnings to sustain investor confidence
  • Need to meet productivity targets at work
  • Desire for status symbols such as bigger house, nicer car, etc.

3. Attitude/Rationalization

Those involved in a fraud may be able to rationalize a fraudulent act as being consistent with their personal code of ethics. Some individuals possess an attitude, character, or set of ethical values that allows them to knowingly and intentionally commit a dishonest act.  Many fraudsters view themselves as ordinary people, not criminals, so it becomes easier to justify their acts.

In committing fraud, employees will seek to justify their actions by using rationalizations such as, “I didn’t get that raise I was promised,” or “I work harder than anyone else,” or “They have so much money they’ll never notice.” Rationalizations are difficult to combat because each individual is likely to have unique reasons or justifications for their fraudulent actions.

ACFE identifies these common rationalizations:

  • “I was only borrowing the money.”
  • “I was entitled to the money.”
  • “I had to steal to provide for my family.”
  • “I was underpaid; my employer cheated me.”
  • “My employer is dishonest to others and deserved to be fleeced.”

 

Combating Occupational Fraud

The best way to prevent employee fraud is to adopt practices that will decrease opportunity and incentive. Lack of or easily overridden controls, absence of management review, and inadequate auditing are common factors that allow fraud to occur.

For more than 25 years, the experts at Lowers Risk Group have helped clients proactively address employee fraud with enterprise risk management strategies and loss prevention services that protect people, brands, and profits.  We invite you to request a consultation to discuss your organization’s risk management approach.

ABOUT THE AUTHOR

Lowers & Associates
Lowers & Associates provides comprehensive enterprise risk management solutions to organizations operating in high-risk, highly-regulated environments and organizations that value risk mitigation.
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