During Fraud Awareness Week, it’s important to highlight the reasons why people commit fraud so we can educate others and help business owners prevent fraud from happening to their businesses.

This article from the ACFE website discusses The Fraud Triangle, a model for explaining the factors that cause someone to commit occupational fraud.

The Fraud Triangle

The fraud triangle originated from Donald Cressey’s hypothesis:

Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.1

The Fraud Triangle consists of three components which, together, lead to fraudulent behavior:

• Pressure
• Opportunity
• Rationalization

Pressure

The first leg of the fraud triangle represents pressure. This is what motivates the crime in the first place. The individual has some financial problem that he is unable to solve through legitimate means, so he begins to consider committing an illegal act, such as stealing cash or falsifying a financial statement, as a way to solve his problem. The financial problem can be personal (e.g., he’s too deep in personal debt) or professional (e.g., his job or business is in jeopardy).

Examples of pressure that commonly lead to fraud include:

• Inability to pay one’s bills
• Drug or gambling addiction
• Need to meet earning to sustain investor confidence
• Need to meet productivity targets at work
• Desire for status symbol such as a bigger house, nicer car, etc.

Opportunity

The second leg of the fraud triangle is perceived opportunity, which defines the method by which the crime can be committed. The person must see some way he can use (abuse) his position of trust to solve his financial problem with a low perceived risk of getting caught.

It is also critical that the fraud perpetrator be able to solve his problem in secret. Many people commit white-collar crimes to maintain their social status. For instance, they might steal to conceal a drug problem, pay off debts, or acquire expensive cars or houses. If a perpetrator is caught embezzling or falsifying financial information, this will hurt his status at least as much as the underlying problem he was trying to conceal. So the fraudster not only has to be able to steal funds, he has to be able to do it in such a way that he will likely not be caught and the crime itself will not be detected.

Rationalization

The third leg of the fraud triangle is rationalization. The vast majority of fraudsters are first-time offenders with no criminal past; they do not view themselves as criminals. They seem themselves as ordinary, honest people who are caught in a bad set of circumstances. Consequently, the fraudster must justify the crime to himself in a way that makes it an acceptable or justifiable act.

Common rationalizations fraudsters use include:

• “I was only borrowing the money.”
• “I was entitled to the money.”
• “I had to steal to provide for my family.”
• “I was underpaid; my employer cheated me.”
• “My employer is dishonest to other and deserved to be fleeced.”

1Donald R. Cressey, Other People’s Money (Montclair: Patterson Smith, 1973) p. 30.

To view the original article, click here.