What is the Fraud Triangle Theory?
There was a criminologist named Donald Cressey who created the fraud triangle theory in the year 1950 which consists of three components that are usually present when someone chooses to commit fraud. Fraud Triangle Theory was briefly explained by dissecting them into psychological and sociological paradigms. The combination of these three factors like pressure, opportunity, and rationalization is what makes fraud most likely to happen according to Cressey.
The fraud triangle is a popular technique in fraud detection and prevention because it helps explain why people would commit fraudulent acts in the first place. The fraud risk triangle has also made it possible for them to put controls and procedures in place that lower the likelihood of fraud in addition to helping companies in identifying warning indicators.
The Three Elements of the Fraud Triangle
The procedure of recognizing probable fraud scenarios requires an understanding of the three components of the fraud triangle which is mandatory for the jury. It is interesting to know that every one of these components are essential when it comes to influencing a person’s choice to commit fraud. Following are the elements which are explained in detail.
1. Pressure (or Incentive)
The pressure is sometimes also known as the “motivation” to commit fraud and that is why it is the first element of the fraud triangle. This component does stand for the pressures an individual may experience in the form of financial, emotional, or personal, that could lead them to commit fraud. There are chances that the pressures might originate from a number of things, such as personal crises, lifestyle demands, or financial issues also.
The following are typical instances of fraud triangle pressure:
Financial Strain: People who are struggling financially might turn to deception as a way to lighten their load.
Personal Issues: The feelings of desperation can be brought on by stressors like debt, gambling, addiction, family problems or others.
Performance Expectations: It might be possible that workers may experience pressure to fulfill goals or produce outcomes, which may cause them to fabricate documentation, embezzle money or something similar..
The main thing which is highlighted in this point is that a person cannot conduct fraud unless they are under financial or personal pressure to do so.
2. Opportunity
The ‘Opportunity’ is the second component of the fraud triangle where people are unlikely to commit fraud unless they see a way to do so without getting detected. This component has simply focused on the structures and circumstances that initially permit fraud to occur in the initial stage.
It is more likely that a fraud triangle opportunity occurs when an organization lacks management, controls, or safeguards. Let us take an example, fraud is more likely to occur when there are inadequate controls to identify or stop fraudulent activity when an individual has access to funds, accounts, information or other similarly confidential stuff.
3. Rationalization
Rationalization is the third component of the Fraud Triangle, which enables individuals to mentally justify fraudulent behavior. Even when they are aware their actions are wrong, people may convince themselves that such behavior is necessary or appropriate under certain circumstances. This helps explain why individuals who typically act morally can still engage in fraud.
Rationalization serves as a mental defense mechanism, allowing people to align their actions with their internal moral beliefs, thus avoiding feelings of guilt or shame. This psychological process becomes particularly relevant in areas like PEP screening, where individuals in positions of power might rationalize unethical financial behavior due to their perceived importance, entitlement, or political pressure. Recognizing rationalization in such contexts is crucial for effective fraud prevention and compliance monitoring.
The following are typical examples of rationalization in the triangle of fraud:
Feeling Underappreciated: A worker might use the excuse, “I am not getting paid enough for the labor I do,” when it comes to defending theft or financial manipulation.
Justifying the Act as Temporary: When someone believes, “I will pay it back later,” they may justify the deception as a short-term fix for a financial need also.
Blaming the Organization: There are some people who may use the corporation as an excuse for their actions, believing that “the company makes so much money; they won’t miss a small bit.”
The element of rationalization makes it simpler for the scammers to continue their fraud activities simply through helping them deal with the cognitive dissonance between their acts and their personal ideals in the end.
The Triangle of Fraud: Prevention and Mitigation
It is highly preferred that one must have a solid understanding of the fraud triangle with an effort to prevent and comprehend fraud. There is possibility that organizations can lower the risk of fraud by addressing its three components:
Reducing Stress: It should be encouraged to have a healthy workplace, offer financial guidance, guarantee equitable pay, and use Employee Assistance Programs (EAPs) to assist with personal matters.
Reducing Opportunity: There should be strengthened internal controls, divide up tasks, and carry out routine audits in order to restrict access to financial resources.
Addressing Rationalization: There should be encouragement of an ethical culture which explains the repercussions of deception, and use training to highlight accountability altogether.
