Fraud Triangle

What is a Fraud Triangle?

The fraud triangle is a theory designed to explain that fraud is not a random occurrence, but takes place only when the conditions are right for it to occur. It explains the reasoning behind a worker’s decision to commit fraud. There are three stages or elements, which together enable an individual to commit fraudulent activities.

Elements that enable fraud

1. Pressure – At this stage, personal financial pressure or workplace pressure can push the individual to commit the crime. Here the individual perceives pressure as an unsolvable problem. 

2. Opportunity – The individual sees a clear course of action by which the seemingly unsolvable problems can be secretly resolved. The opportunity to solve the problem, in secret, is often the key to seeking opportunity.

3. Rationalisation – In this cognitive stage, the individual tries to justify the fraud committed to make it acceptable to her or his moral compass. Rationalisation is done to minimise the harm caused by the fraud in one’s mind.

History

Also described as the ‘compromise triangle’, the concept of fraud triangle was first put forward by Donald. R. Cressey, an American sociologist and criminologist, and Edwin Sutherland, one of the most influential criminologists of the 20th century. The term ‘fraud triangle’ was coined later by Steve Albrecht, a professor and former president of the Association of Certified Fraud Examiners, based in Texas.

Why is it necessary?

The fraud triangle explains why fraud occurs and how one can establish fraud deterrence to future proof oneself. Breaking the triangle is the key to establishing deterrence, such as removing one of the elements of the triangle to reduce the occurrence of fraudulent activities. Opportunity is the most important element of all, abstaining from it is highly recommended to stay away from fraud. 

(This article was first published in HRKatha print magazine)