1. The Fraud
Triangle
• The fraud triangle is a framework commonly
used in auditing to explain the motivation
behind an individual’s decision to commit fraud.
• Fraud Triangle is the concept that explains the
reason behind committing fraud by workers at a
workplace and consists of three elements that
are responsible for the fraud – pressure,
rationalization and opportunity.
• According to this concept fraud occurs when
conditions for fraud are favorable to fraud
committer and it is not a random occurrence.
• For fraud to occur, all three elements must be
present.
2. History
• To fight fraud, one must not only realize that it occurs, but also how
and why it occurs. Several decades ago, after considerable research,
Donald R. Cressey, a well-known criminologist, developed the Fraud
Triangle.
• Interested in the circumstances that led embezzlers to temptation, he
published Other People’s Money: A Study in the Social Psychology of
Embezzlement.
• Cressey’s hypothesis was: "Trusted persons become trust violators
when they conceive of themselves as having a financial problem
which is non-sharable, are aware this problem can be secretly
resolved by violation of the position of financial trust.
3.
4. Pressure/
Incentive/
Motivation/
culture
• Incentive, alternatively called pressure, refers to an
employee’s/person's mindset towards committing
fraud.
• Financial/emotional forces pushing towards fraud.
• 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.
5. Examples of
things that
provide
incentives for
committing
fraud include:
1. Bonuses based on a financial metric
• Common financial metrics used to assess the
performance of an employee are revenues and net
income. Bonuses that are based on a financial
metric creates pressure for employees to meet
targets which, in turn, may cause them to commit
fraud to achieve the objective.
2. Investor and analyst expectations
• The need to meet or exceed investor and analyst
expectations can create pressure to commit fraud.
3. Personal incentives
• Personal incentives may include wanting to earn
more money, the need to pay personal bills,
a gambling addiction, etc.
6. Opportunity/Control
Opportunity refers to circumstances that allow fraud to
occur.
Chances
Ability to execute plan without being caught
In the fraud triangle, it is the only component that a
company exercises complete control over.
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 easy to control through
organizational or procedural changes.
7. Examples that
provide
opportunities
for
committing
fraud include:
1. Weak internal controls
• Internal controls are processes and procedures implemented
to ensure the integrity of accounting and financial information.
Weak internal controls such as poor separation of duties, lack
of supervision, and poor documentation processes give rise to
opportunities for fraud.
2. Poor tone at the top
• Tone at the top refers to upper management and board of
directors’ commitment towards being ethical, showing
integrity, and being honest. A poor tone at the top results in a
company that is more susceptible to fraud.
3. Inadequate accounting policies
• Accounting policies refer to how items on the financial
statements are recorded. Poor (inadequate) accounting
policies may provide an opportunity for employees to
manipulate numbers.
8. Rationalization/
Values
• Rationalization refers to an individual’s
justification for committing fraud or justification
for dishonest actions.
• Rationalization is discernible by observation of
the fraudster's comments or attitudes.
• 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.
9. Examples of common rationalizations that
fraud committers use include:
1. “They treated me wrong”
• An individual may be spiteful towards their manager or employer and
believe that committing fraud is a way of getting payback.
2. “Upper management is doing it as well”
• A poor tone at the top may cause an individual to follow in the
footsteps of those higher in the corporate hierarchy.
3. “There is no other solution”
• An individual may believe that they might lose everything (for
example, losing a job) unless he or she commits fraud.
11. About Capability
Proposed by David T. Wolfe and Dana R. Hermanson
Opined that fraudster's capability must also be considered.
Two factor: Trait and Ability
The fraudster, it is said, must have the required traits (e.g., greed, weakness of
character, excessive pride, dishonesty, etc.) and
Abilities (e.g., knowledge of processes and controls) to commit the fraud.
It can be argued, however, that traits are components of pressure and that abilities
are opportunity factors.
12. 10-80-10 Rule
The 10-80-10 Rule
supports the
general
assumption of
capability by
breakdown of the
population and
the likelihood of
fraud occurrences.
Essentially: 10 percent of the population will NEVER commit fraud. This is the type of
person that will go out of their way to return items to the correct party.
80 percent of the population might commit fraud given the right combination
of opportunity, pressure, and rationalization.
10 percent of the population are actively looking at systems and trying to find
a way to commit fraud.
13. Source
• National Association of State Auditors, Comptrollers and Treasurers
(NASACT) and the Oregon State Controller’s Division