FRAUD TRIANGLE

You must have heard of Forensic Auditors who investigate fraud occurrences and events and instill controls to minimize future occurrence. These auditors look out for three key drivers that promotes fraud actions. The model is called Fraud Triangle. It explains the why behind employees committing frauds at their workplaces.

Fraud Triangle expatiates that for fraud to occur, these 3 elements must have been present. They are Pressure, Opportunity, and Rationalization.

WHAT IS FRAUD

In Law, Fraud is an act of intentional deception, either by omission or commission, that causes its victim to suffer an economic loss and/or the offender to realize a gain. It can simply be defined as “theft by deception”. Fraud has been on the rise for over the last few years.

In 1950, Donald Cressey, a known criminologist, started the study of fraud by proposing that there must be a reason behind everything people do. Unanswered questions such as why people commit fraud, led to him focusing his research on what drives people to violate trust and commit fraud. He discovered that three factors must be present for fraud to occur.

PRESSURE

Every fraud perpetrator has been triggered by some sort of pressure or perceived pressure to commit unethical behavior. The word “perceive” is extremely vital, as pressure does not have to be real. If the individual feels or believe they are pressurized, this can lead to committing fraud.

Liser in 2007, defined the pressure to commit fraud as “the source of heat for the fire.” But having this pressure does not automatically equate or lead to fraud by an individual. This pressure could be directly related to financial, non-financial, political and social pressure.

OPPORTUNITY

These are circumstances that allow fraud to occur. Opportunity is being mostly examined within the context of weak internal controls, poor tone at the top and inadequate accounting policies.

These opportunities arises when the individual has the technical skills, position, and knowledge of “assets, people, information, and computer systems that enables him or her not only to commit the fraud but to conceal it”. These increased opportunities serve as motivation for fraudsters to steal money and other assets. Cressey duly noted that in most cases, the lower the risk of being caught, the more likely it is that fraud will take place.

RATIONALIZATION

In a simple term, rationalization refers to an individual justification for committing fraud. If an individual cannot justify unethical actions, it is very much improbable that he or she will engage in fraud. Highlighted examples of rationalization of fraudulent act by Cressey are “I had to steal to provide for my family”, “I was only borrowing the money” “I am being underpaid”. Rationalization can be said to be fueled by the lack of personal integrity, ethical values and certain personal circumstances.

For fraud to occur, these 3 components that makes up the Fraud triangle must be present. Despite the efforts of various Anti-fraud organizations, it would appear that the present state of fraud prevention is more like treating an incurable disease.

Fraud continues to be a major problem. It is less expensive and more effective to prevent fraud from happening than to detect it after the occurrence.

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