The Fraud Triangle Theory

The Fraud Triangle

Fraud is a crime that is more costly than most people realize. According to the FBI, non-healthcare related fraud alone is estimated to cost the U.S. over $40 billion a year! Yet fraud and other unethical behavior does not happen randomly. Certain factors must be present to allow most individuals to commit these crimes.

American criminologist Donald Cressey developed a theory – known as the Fraud Triangle – that explains the factors that lead to fraud and other unethical behavior. When businesses and organizations understand the Fraud Triangle, they can more effectively combat criminal behavior that negatively impacts their operations.

Understanding The Fraud Triangle

The three factors that make up the fraud triangle are:

  1. Pressure. Most individuals require some form of pressure to commit a criminal act. This pressure does not need to necessarily make sense to outside observers, but it does need to be present. Pressures can include money problems, gambling debts, alcohol or drug addiction, overwhelming medical bills. Greed can also become a pressure, but it usually needs to be associated with injustice. “The company has not been paying me what I am really worth,” for instance.
  2. Opportunity. An opportunity to commit the act must be present. In the case of fraud, usually a temporary situation arises where there is a chance to commit the act without a high chance of being caught. Companies that are not actively working to prevent fraud can present repeated opportunities to individuals who meet all three criteria of the fraud triangle.
  3. Rationalization. The mindset of a person about to commit an unethical act is one of rationalization. The individual manages to justify what he or she is about to do. Some may think they are just going to borrow the stolen goods, or that they need the money more than the “big” company they are stealing from.

Using The Fraud Triangle

The fraud triangle provides a useful framework for organizations to analyze their vulnerability to fraud and unethical behavior, and it provides a way to avoid being victimized. Almost universally, all three elements of the triangle must exist for an individual to act unethically. If a company can focus on preventing each factor, it can avoid creating fertile ground for bad behavior.

Relieve Pressure

Companies only have so much impact on the personal lives of customers and employees. Identifying any possible pressures that the company could have an impact on – such as money problems, substance abuse, etc. – can be helpful. Working to relieve these issues can help prevent criminal behavior.

Minimize Opportunity

Companies should always be looking to minimize the opportunity for fraud and unethical behavior. Brumell Group can assist with this. Working as a Fraud Consultant, Brumell Group can help companies analyze operations, review internal controls and address any current or future vulnerabilities. It is a worthwhile investment for any organization that wants to remain secure against the hazards of fraud.

Target Rationalization

One way to prevent fraud is to keep individuals from ever being able to rationalize the behavior in the first place. Companies can create a “zero tolerance” policy towards fraudulent behavior, and remind employees and customers of this policy on a regular basis. Companies can also make certain that individuals know the cost of fraud to other customers and other employees. Letting individuals know that there are heavy consequences makes it more difficult to minimize the unethical behavior.

For more information on theories behind fraud, fraud investigations and more, contact us today at 904-880-5150.