The Fraud Triangle

The Fraud Triangle

My blog spends a lot of time dedicated to fraud, fraud deterrence and fraud detection.  So, in order to really understand all of those things it is best to understand the fraud triangle.  The fraud triangle is the basis of almost all frauds committed and can help shine light on how to either detect, or deter fraud.

First is the motivation, or the factor that causes someone a need to commit fraud.  There can be a number of reasons; gambling debt, marital problems, health problems, a need to uphold an image, or sometimes just plain because they can.  Now, it is important to remember that fraud usually has one of these factors but these factors alone do not make someone a fraudster.  The reasoning can vary but it is often a hardship that is remedied by monetary gain.

Secondly is the opportunity, which is pretty explicit but can mean different things.  Obviously, if a company has weak internal controls or one person filling multiple duties the opportunity is obvious.  There are other cases where an employee can use their position for personal gain by offering unapproved discounts or purchase guarantees to other companies.  And then there are managers who use their position to push through questionable transactions, utilizing their power as an opportunity.

Lastly is rationalization, this is how a person usually makes the act of committing fraud a lesser, not so terrible idea.  In a lot of cases it’s that the company makes so much money they will never miss it, or that they treat the employees so poorly they deserve someone stealing from them.  Another common rationalization is that the fraudster believes they will pay back the outstanding amount and just need to avoid getting caught.

Now that you understand how the fraud triangle affects the majority of fraud it is important to note that there are some, a small amount albeit, fraudsters who are serial fraudsters.  These are fraudsters that are not confined to the fraud triangle and commit fraud just because they can, such as a senior level manager for a large, publicly traded company, making tens of millions of dollars a year selling insider trading information for a couple hundred thousand dollars.  These types of fraudsters are why I always push for pressing charges, because often business’s don’t and the serial fraudster goes on to commit fraud again when a normal background check would have revealed a conviction if it existed.

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