Running head: FRAUD TRIANGLE 1

Fraud Triangle: The three conditions that Increase the risk of fraud

Heather McKay

SLCC

11/21/2017

ACCT. 1110

Dr. George Smith

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Introduction

The fraud triangle is a model for explaining the factors that cause someone to commit

occupational fraud, developed by criminologist Donald Cressey. This model originated from

Cresseys study of fraud, by arguing that there must be a reason behind everything people do.

Questions as to why do people commit fraud, led him to focus his research on what drives people

to violate trust? His theory was based on in-depth interviews with those convicted of trust

violations.

Trusted persons become trust violators, when they conceive of themselves as having a

financial problem that is non-shareable and have knowledge or awareness that this problem can

be secretly resolved by a violation of the position of financial trust. Also they 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 (Cressey 1953, p. 742).

It was reported that in all of his cases and interviews he studied conformed to a three-step

process. Which are the three conditions that make up the Fraud Triangle, they are commonly

perceived as pressure, opportunity, and rationalization.

Pressure

Perceived pressure refers to the factors that lead to unethical behaviors. Every fraud

perpetrator faces some pressure to commit unethical behavior (Abdullahi and Mansor, 2015a).

The pressure is seen by the individual as unsolvable by orthodox, legal, sanctioned routes

and non-shareable with others who may be able to offer assistance. Which is often what

motivates someone to engage in fraud in the first place. Lister (2007:63) defined pressure to

commit fraud as the source of heat for the fire.

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It can be either personal financial pressure, such as debt problems, an addiction, work

place debt problems, such as a shortfall in revenue, or even a sudden job loss.

A failing bank or business might be considered by one person as presenting problems

that must be shared with business associates and members of the community, while another

person might conceive these problems as non-shareable (Donald Cressey 2011, p. 63).

Opportunity

For opportunity many people in both private and public sectors have access to certain

areas that enable them to commit and conceal fraud.

Opportunity is created by ineffective control or governance system that allows an

individual to commit organizational fraud. In the field of accounting, this is termed as internal

control weaknesses. The concept of perceived opportunity suggests that people will take

advantage of circumstances available to them (Kelly and Hartley, 2010).

With the combination of pressure and being exposed to such opportunities on a daily

basis, it creates temptation to abuse their position and solve the perceived non-shareable

financial problem in a way they believe is unlikely to be detected. In most cases the

ability to solve the problem in secret is the key to the perception of a viable opportunity.

Even with these two elements most fraud still requires rationalization.

Rationalizations

Many people are most often first time offenders and would not view themselves as a

potential perpetrator, so in order to commit an act most would perceive as wrong, they would

need to justify it to themselves.

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Rationalization is a justification of fraudulent behavior because of an employees lack of

personal integrity, or moral reasoning (Rae and Subramanian, 2008).

Some examples of rationalizations of fraudulent behavior include I was only borrowing

the money, I was entitled to the money because my employer is cheating me. Additionally,

some fraudster excuses their action as I had to steal to provide for my family, some people

did it why not me too (Cressey, 1953).

Cases where the employee felt entitled to the money and where perhaps even planning on

returning the money once the financial crises was resolved, made it tempting to think of fraud as

a victimless crime because corporations civic institutions arent people.

Some of the most common types of fraud are not even seen as such to the perpetrator,

example includes service providers over billing insurance companies, employees fudging time

sheets or expense reports, or tax payers failing to report cash earning. Even though the fraud may

seem small and harmless people will virtually be affect in every case.

Conclusion

Many people are susceptible to not only the temptation to commit fraud but to convincing

themselves that theyve done nothing wrong. This may further push the question, so why does

fraud happen? While individual motivations may differ form case to case, the Fraud Triangle

shows three conditions that increase the risk of fraud. All three conditions must be present in

varying degrees in order for fraud to occur. A well off and financially established worker is not

going to commit fraud if the opportunity is not available, or if the risk of getting caught is too

high. A person who can see an opportunity to alter financial statements and has the drive to

commit the fraud is unlikely to do so if they cannot justify and rationalize the fraud. However,

the more pressure a person feels to commit fraud, makes it easier for them to justify it.
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References:

Cressey, D. R. (1950). The criminal violation of financial trust. American Sociological

Review, 15(6), 738-743.

Kranacher, M., Riley, R. A., & Wells, J.T. (2011). Forensic accounting and fraud examination

Hoboken, NJ: Wiley, 63.

What is the Fraud Triangle? (2013, December 02). Retrieved November 22, 2017, from

https://www.hrzone.com/hr-glossary/what-is-the-fraud-triangle

Mansor, N. (2015). Fraud Triangle Theory and Fraud Diamond Theory. Understanding the

Convergent and Divergent For Future Research. International Journal of Academic

Research in Accounting, Finance and Management Sciences, 5(4), 38-45.

Kassem, R., & Higson, A. (2012). The new fraud triangle model. Journal of Emerging Trends in

Economics and Management Sciences, 3(3), 191.

Skousen, C. J., Smith, K. R., & Wright, C. J. (2009). Detecting and predicting financial

statement fraud: The effectiveness of the fraud triangle and SAS No. 99. In Corporate

Governance and Firm Performance (pp. 53-81). Emerald Group Publishing Limited.