Illuminations

The Fraud Triangle

and What You Can Do About It
Despite intense efforts to stamp out corruption, misappropriation of assets, and fraudulent
financial reporting, it appears that fraud in its various forms is a problem that is increasing in
frequency and severity.

ne of the older and more basic concepts in fraud deterrence and detection is the fraud triangle. While
researching his doctoral thesis in the 1950s, famed criminologist Donald R. Cressey came up with this hypothesis to
explain why people commit fraud.

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.
Opportunity is the ability to commit fraud. Because fraudsters dont wish to be caught, they must also believe that
their activities will not be detected.
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.
Opportunity is created by weak internal controls, poor management oversight, and/or through use of ones position and
authority. Failure to establish adequate procedures to detect
fraudulent activity also increases the opportunities fraud for
to occur.

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THE CERTIFIED ACCOUNTANT

1st Quarter 2009 Issuse #37

Motivation, or can be referred to as incentive, is another

aspect of the fraud triangle, it 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 non financial. There may be high
pressure for good results at work or a need to cover up
someones 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.
Rationalization is a crucial component in most frauds.
Rationalization involves a person reconciling his/her behavior with the commonly accepted notions of decency and trust.
For those who are generally dishonest, it is probably easier
to rationalize a fraud. For those with higher moral standards,
it is 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 doesnt
need the money or wont miss the assets. Others believe that
the company deserves to have money stolen because of
bad acts against employees.

Illuminations

Finally, Organizations are implementing tighter controls and

broader oversight. The auditing profession has adopted
more rigorous auditing standards and procedures, and software developers are adding continuous monitoring features
to back-office systems. It remains unclear whether these efforts are sufficient to mitigate the fraud problem.
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 employees needs or rationalizations, but by limiting opportunities for fraud, the company can reduce it
to some extent. Of the three elements, opportunity is
the leg that organizations have the most control over. It
is essential that organizations build processes, procedures and controls that dont needlessly put employees
in a position to commit fraud and that effectively detect
fraudulent activity if it occurs.
References:
http://www.boisestate.edu

Red Flags of Fraud

Some warning signs that may indicate the fraud risk.

Wheeler and Dealer

Domineering/Controlling
Dont like people reviewing their work
Strong Desire for Personal Gain
Have a Beat the System Attitude
Live Beyond Their Means
Close relationship with customers or vendors
Unable to Relax
Often have a too good to be true work
performance
Dont take vacation or sick time or only take leave
in small amounts.
Often work excessive overtime
Outwardly, appear to be very trustworthy.
Often display some sort of drastic change in
personality or behavior

http://www.allbusiness.com
http://www.nysscpa.org

EXHIBIT 2
The Fraud Triangle
Pressure/Incentive
Pressure on employees to
misappropriate cash or
other organizational assets.

Opportunity
Circumstances that allow an
employee to carry out the
misappropriation of cash or
other organizational assets.

Rationalization
A frame of mind or ethical
character that allows
employees to intentionally
misappropriate cash or other
organizational assets and
justify their dishonest actions.

Sources: Occupational Fraud Abuse, by Joseph T. Wells, CPA, CFE (Obsidian Publishing Co., 1997);
Fraud Examination, by W. Steve Albrecht (Thomson South-Western Publishing, 2003).

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