Question

Describe the fraud triangle and what it represents.

Answer 1

The fraud triangle is a framework commonly used in auditing to explain the motivation behind an individual's decision to commit fraud. The fraud triangle outlines three components that contribute to increasing the risk of fraud: (1) opportunity, (2) incentive, and (3) rationalization.

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. Broken down, they are:

• 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 term fraud triangle was first coined by American sociologist Donald R. Cressey who worked extensively in the fields of criminology and white-collar crime. Fraud is often a white-collar crime but not always.

Opportunity

If one is talking about theft, there must be something to steal and a way to steal it. Anything of value is something to steal. Any weakness in a system—for example, lack of oversight—is a way to steal. Of the three elements of the Fraud Triangle, opportunity is often hard to spot, but fairly easy to control through organizational or procedural changes.

Pressure

Pressure in this case is another way of saying motivation. What is it in one’s life that drives one to commit fraud? Pressure sometimes involves personal situations that create a demand for more money; such situations might include vices like drug use or gambling or merely life events like a spouse losing a job. At other times, pressure arises from problems on the job; unrealistic performance targets may provide the motive to perpetrate fraud.

Rationalization

There are two aspects to rationalization: One, the fraudster must conclude that the gain to be realized from a fraudulent activity outweighs the possibility for detection. Two, the fraudster needs to justify the fraud. Justification can be related to job dissatisfaction or perceived entitlement, or a current intent to make the victim whole sometime in the future, or saving one’s family, possessions or status. Rationalization is discernible by observation of the fraudster's comments or attitudes.