Fraud triangle

The fraud triangle is a model used to explain why people commit fraud. The model indicates that people are motivated to commit fraud when they have a financial need or pressure, an opportunity, and a rationalization for the fraud. The ideas behind the triangle were developed in the 1950s and have been used since. The fraud triangle is an iconic teaching and learning tool that is used to identify and analyze fraud. The idea of the triangle is that all the elements have to be present for a person to commit fraud. In the early twenty-first century, however, some researchers and scholars began to question whether the fraud triangle was still an effective tool in discussing fraud.

The Triangle: Pressure, Opportunity, and Rationalization

According to the fraud triangle model, people must have three specific points to commit fraud. The first part of the fraud triangle is pressure. The pressure is a financial need or perceived financial need that triggers a person to look for money from outside their normal sources. When the person's financial need cannot be alleviated by legitimate sources, the person may consider fraud. Some common sources of pressure include divorce, buying or renovating a house, personal medical problems, family medical problems, gambling, and alcohol or drug addiction.

The opportunity point of the fraud triangle indicates that individuals who commit fraud must have the ability to commit the fraud. In most organizations, only certain people are positioned to commit fraud because they have access to the company's financial accounts and information. In other instances, businesses and organizations have weak controls in place, giving more people an opportunity to commit fraud.

The third point of the triangle is rationalization, meaning fraudsters can justify or rationalize their actions in many ways. Some people rationalize their actions because they say they are just borrowing the money and will pay it back. Others rationalize the fraud in other ways, including by telling themselves they are righting a wrong that was done to them by their company or organization.

Origins of the Fraud Triangle

Criminologist and sociologist Donald Cressey is the person most responsible for developing the fraud triangle. In the 1950s, Cressey and follow sociologist Edwin Sutherland published articles about fraud and the conditions that enabled the crimes to be committed. Through research and publications, Cressey developed the triangle.

When Cressey published his research, he stressed that all the elements of the triangle must be present for fraud to take place. He believed that having only one element of the fraud triangle would not motivate a person to commit fraud. Over the years, the triangle has become a common tool for auditors and others who are searching for fraud in businesses and nonprofit organizations.

Using the Fraud Triangle to Thwart Fraud

One of the most important ways the fraud triangle is used is in identifying potential fraud before it occurs. When a company is concerned about fraud, recognizing pressure, opportunity, and possible rationalization can help identify possible fraud threats. Companies and organizations should consider these factors in evaluating employees and members.

Individuals may have different motivations for committing fraud. Nonmanagement employees often commit fraud because they experience a new, unforeseen financial pressure. These might include a spouse losing a job, a family member becoming ill, a relative having troubles with the law, or addiction problems. Managers might feel pressure or incentive for committing fraud for other reasons. For example, if a management employee's pay structure is tied to certain goals, an individual might be more likely to commit fraud if the goals are not met and the employee's pay is lower.

Companies and organizations should also be aware of potential opportunities for fraud. Weak controls give individuals more opportunities to commit fraud. Employees who handle many different tasks in a company also have more opportunity. Furthermore, chances to commit fraud can arise when employee monitoring is not effective.

Employees can rationalize their fraud in many ways, but companies should be aware of some of the most common rationalizations. Employees who commit fraud may do so because they believe they work harder than the company owner or other highly paid employees. Some individuals may do it because they tell themselves that they will pay the money back. Still others commit fraud because they feel they were overlooked for a promotion or they believe they were slighted by the company in some other way.

Companies and organizations can also use the three points of the triangle to discourage individuals from committing fraud. For example, companies can project a strong sense of ethical behavior among employees to discourage people from rationalizing fraud. Also, companies should maintain strict controls to give fewer employees the opportunity to commit fraud.

The Case Against the Fraud Triangle

The fraud triangle continues to be an important tool in accounting and finance. Nevertheless, some academics feel the fraud triangle is inadequate. One example opponents of the fraud triangle use is that of a Wal-Mart executive named Thomas Coughlin. In 2005, he was charged with defrauding the company of roughly $500,000, even though his salary was roughly $6 million per year.

Professors from the University of West Virginia point out that Coughlin did not have a particular financial pressure when he committed fraud. Instead, the professors argue that Coughlin and others like him are predators who will commit fraud because they can, not necessarily because of financial pressure. They argue that the fraud triangle is good for identifying some fraudsters, however, it will not identify all people who commit fraud, and an expanded fraud model may be necessary.

Bibliography

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Daks, Marty. "Red Flags: Beware the Fraud Triangle." The NonProfit Times, 4 Mar. 2014, www.thenonprofittimes.com/news-articles/red-flags-beware-the-fraud-triangle/. Accessed 28 Jan. 2025.

"Fraud 101: What Is Fraud?" Association of Certified Fraud Examiners, www.acfe.com/fraud-triangle.aspx. Accessed 28 Jan. 2025.

"The Fraud Triangle." National Whistleblower Center, www.whistleblowers.org/fraud-triangle/. Accessed 28 Jan. 2025.

Loughran, Maire. "How to Recognize the Triangle of Fraud." For Dummies, John Wiley & Sons, 26 Mar. 2016, www.dummies.com/how-to/content/how-to-recognize-the-triangle-of-fraud.html. Accessed 28 Jan. 2025.

"What Is the Fraud Triangle?" Embroker, 23 Jan. 2025, www.embroker.com/blog/fraud-triangle/. Accessed 28 Jan. 2025.