The Fraud Triangle: Understanding why people commit fraud
The Fraud Triangle is a framework containing three elements. Each element must be present for an individual to engage in fraudulent behaviour.
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The Fraud Triangle
One of the most widely recognised frameworks for understanding the reasons behind why individuals commit fraud is the fraud triangle. The fraud triangle model was developed by criminologist Donald Cressey in the 1950s and is made up of three components; pressure, opportunity and rationalisation. It is argued that these three elements must be present before an individual will engage in any fraudulent behaviour.
Pressure
Pressure refers to the stress or motivation that drives an individual to commit fraud. Pressure to commit fraud is often founded in financial difficulty, unmet personal or professional goals, or a desire to maintain a particular lifestyle. In Cressey’s original study, he found that individuals who commit fraud often faced some form of non-shareable financial problem, such as a personal debt or gambling addiction. In today’s climate it’s also worth considering that others may feel pressure to commit fraud simply to survive. In a cost of living crisis individuals may feel they have no other option.
Wolfe and Hermanson (2004) suggested that pressure can also come from non-financial sources, such as job dissatisfaction, unrealistic performance expectations, or the need to achieve status. In today’s world this is heightened with the presence of social media. People are quick to share photos of designer items, pristine homes and luxury holidays and so creating unrealistic expectations for others. These pressures create a perceived need that fraudsters attempt to satisfy through dishonest means.
Opportunity
Opportunity is the element that allows fraud to occur. It refers to the circumstances or situations that make it possible for the individual to commit fraud without being caught. This could mean weak internal controls, lack of fraud awareness within an organisation, or the ability to bypass security measures. Businesses with little or no fraud awareness are more likely to have poor controls in place making it easier for employees to take advantage of and commit fraud.
A study conducted by Dorminey et al. (2010) found that poor corporate governance and inadequate internal controls are significant factors that create opportunities for fraud . The study highlighted that when individuals perceive a low risk of detection, they are more likely to engage in fraudulent activities.
Rationalisation
Rationalisation is the cognitive process by which individuals justify their fraudulent actions. This allows them to commit the act without feeling like they are doing anything wrong. Common rationalisations include believing that the act is temporary, thinking that “everyone else is doing it,” or feeling entitled due to perceived mistreatment or underappreciation at work. Where employees have a grievance with their employer, they may see it as an act of revenge.
The work by Cressey found that rationalisation was a crucial factor for fraudsters, particularly those who saw themselves as honest people. They often rationalised their actions as necessary or justified under the circumstances . Subsequent research by Anand, Ashforth, and Joshi (2005) looked deeper into the concept of rationalisation, identifying specific techniques such as denial of injury (believing that no one is hurt by the fraud) and appeal to higher loyalties (believing that the act serves a greater good) .
Integrating the Fraud Triangle into your Fraud Prevention Strategy
Understanding the Fraud Triangle not only provides insights into why individuals commit fraud but also offers practical implications for fraud prevention in the workplace. By addressing each component of the triangle, businesses can reduce the likelihood of fraudulent activities occurring.
Mitigating Pressure: Businesses can help mitigate the pressure to commit fraud by promoting a healthy work-life balance, offering financial wellness programs, and setting realistic performance goals. Studies have shown that employees with lower stress levels are less likely to engage in unethical behaviour .
Reducing Opportunities: Strengthening internal controls, conducting regular audits, and implementing robust oversight mechanisms are crucial in reducing opportunities for fraud. Effective training programs that educate employees on expectations around ethical behaviour and the consequences of fraud can also help .
Challenging Rationalisations: Creating a strong ethical culture within your business can help challenge rationalisations. Encouraging open communication, promoting transparency, and providing a whistleblowing channel for reporting suspicious behaviour can reinforce the importance of a counter fraud culture.
The Fraud Triangle is a powerful tool for understanding the psychological mechanisms that contribute to an individual committing fraud. By recognising the pressures that motivate fraud, the opportunities that enable it, and the rationalisations that justify it, businesses and individuals can better protect themselves against the risks of fraud.