Fraud Triangle: opportunity, motivation, justification

10 November 2020

When and in what kind of environment does fraud occur?

What is the trigger for a person to commit fraud?

What are the conditions for fraud to occur?

How does the fraudster justify his deed to himself and to others?

The Hypothesis of Committing Fraud

The first person to link the above questions to the answers was the American sociologist and forensic scientist Donald Cressey.

In the 1950s, following several interviews with prisoners and research that lasted more than 10 years, Donald Cressey created a hypothesis that explains the motivation behind a person’s decision to commit fraud. The theory, which is used in auditing and antifraud investigations, is called the Fraud Triangle. Cressey concluded that:

Trusted persons become violators of trust when they consider that they have a financial problem that cannot be shared, are aware that this problem can be solved in secret by violating their financial trust and are able to justify their fraudulent behavior by statements that adapt their conceptions of themselves from being trustworthy to being users of the funds or properties entrusted to them.

In other words, fraud occurs when 3 conditions are met simultaneously: opportunity, motivation and justification.

But what is fraud?

FRAUD, fraud. Committing with bad faith, in order to obtain benefits, acts that infringe the rights of another (damaging to another person); theft. Deception committed by someone, usually to make a material profit from the violation of another’s rights. Amount stolen by fraud.

Therefore, fraud refers to a deliberate deception, caused by an employee or an organization for personal gain. Fraud is a deceptive activity used to obtain an advantage or generate an illegal profit. In addition, the unlawful act benefits the perpetrator and harms other parties involved.

To combat the fraudulent phenomenon, it is important to understand not only that it is a real threat, but also why it occurs.

  1. The opportunity or the occasion are those conditions, circumstances that provide the appropriate framework for fraud’s occurrence.

Of the 3 components that make up the Fraud Triangle, opportunity is the only one that companies can fully control, through well-developed procedures and processes. Paradoxically, most of the time, the opportunity is as easy to control as it is difficult to notice.

The main vulnerabilities that favor the occurrence of fraud are:

procedures that are not well developed, that do not have clear delegated responsibilities, that lack the measuring instrument or even measurement constancy, unclear internal processes or that are completely missing.

managers with weak moral standards and professional ethics, prone to fooling the mechanisms and taking for themselves what they think they deserve, but do not receive.

– poor accounting tools, which do nothing but open the door of the safe and invite fraudsters to use whatever they want.

  1. The motivation or the cause, or what causes a person to commit fraud.

The main reason for committing an illegal act, such as fraud, is the need. The types of need, however, vary. These can be:

financial needs, caused by personal situations, such as illness or loss of employment by a family member, addictions, from drugs to gambling or debts to be paid. Another financial cause is a lower salary than the one recommended for the position or responsibilities included in the job description.

validation needs, whether we are talking about self-sufficiency and the individual’s desire to prove that he can, or whether we are talking about personal frustrations, masked and “resolved”, in the eyes of the fraudster, by the weight of his gesture.

professional needs related to the fulfillment, even if fraudulent, of some professional performance objectives, set by hierarchical superiors or investors.

  1. The justification is the excuse that the perpetrator uses for himself and for others, when needed.

You have certainly wondered, at least once, what was in the mind of the person who committed a certain crime. What did he think of? What was his reasoning?

– They treated me badly. They deserve it.

– Others do it as well and no one has died because of it.

– I have no other solution, I have to do it.

– I’ll make up for it, I will put it back.

– I don’t get paid enough, I deserve this money.

– If they don’t give it to me, I will take it myself.

These are the most commonly used justifications with which fraudsters fool their inner voice or arguments they use when they are discovered. In fact, you can easily detect how high the risk for an employee to defraud the company is by studying his comments or attitude towards the employer.

Does Everyone Commit Fraud? The 10/80/10 Rule of Ethics

At some point, at least, each of us found ourselves in a situation where all 3 conditions above were simultaneously met. But do all people who are in this situation commit fraud?

According to the theory called the Rule of Ethics 10/80/10, created by the National Association of State Auditors, Controllers and Treasurers (NASACT) and the State Comptroller Division of Oregon, USA, the population is divided into 3 different categories:

10% of the population will never commit fraud. This category includes those people who do not back down from making efforts, in order to return something to its rightful owner, for example.

80% of the population could commit fraud if there is the right combination of opportunity, motivation and justification.

10% of the population is in an active search for system vulnerabilities, with the clear aim of committing fraud.

I did not mention at all the character traits, such as greed or pride, that can influence an individual’s predisposition to commit fraud, because they are not a strong enough self-triggering factor. Instead, they can increase the risk of committing an illegal act, if the necessary premises already exist, through the existence of all 3 elements that make up the Fraud Triangle.

How Can You Prevent Fraud in a Company?

Fortunately, there are specific methods and tools that can be used in order to clearly identify a company’s vulnerabilities and measure the fraud risks to which a business is exposed. The implementation of counteract measures that partially reduce or control these risks, is a decision on which the financial health of the company depends.

Whether the risk was identified as a result of the anti-fraud investigation or was already known by top management and was tested by investigators, our Risk Management service refers to investigations and counter-information training activities. More specifically, SPIA specialists offer Due Diligence and Risk Management services, so that the people on the management board will be advised and taught how to protect their company and its interests against vulnerabilities of various types.

Both Due Diligence and Risk Management are two prevention services, meant to avoid the appearance of the 3 components that make up the Fraud Triangle and to protect your company from threats to its stability.