Why Fraud Occurs: The Fraud Triangle

Pressure, opportunity and rationalization. Those are the three factors that must be present for a person to commit fraud in workplace.

I’ve written a lot about the effects of fraud, the cost of it to the US economy and how to prevent it. But why is there so much fraudulent activity going on every day?

Criminologist Dr. Donald Cressey asked the same question in 1950. Cressey, who is considered the founder of the modern study of organized crime, became fascinated with embezzlers and wrote his dissertation on them for his Ph.D. in criminology. He was puzzled because most people who commit fraud are not criminals. They are generally “good” people. So what happens?

He interviewed 250 criminals who must have accepted a position of trust in good faith and must have violated that trust. His research was published in Other People’s Money: A Study in Social Psychology of Embezzlement in 1953. His theory on why fraud occurs eventually became know as the Fraud Triangle and is still the classic model to explain why people commit fraud in the workplace.

Cressey wrote that all three factors of the fraud triangle must be in place for an employee to commit fraud.

fraud7Pressure/Incentive

The thief is initially motivated because he or she has some type of non-sharable financial pressure or incentive. They may be involved in gambling, have a drug addiction or possibly took on more debt than they can handle. Or they could have a desire for material goods beyond their means, such as designer clothes and handbags or a new car. Sometimes an employee feels unfairly treated by a company and this is their way to get back.

The non-sharable aspect is an important distinction because the person generally feels shame or embarrassment over the situation or is concerned about potential disgrace. These are generally crimes committed in secret.

Amy Wilson was a respected office manager when she was caught for embezzling $345,000 and sent to jail. Now out and reformed, she speaks about what she did to help businesses prevent fraud. The first time she embezzled, ironically, was to hire a lawyer for her 18-year-old son, who had been charged with a felony and put in jail. When she was caught, not even her husband knew of her crime.

Opportunity

The second factor is opportunity. The criminal has to see what he perceives to be an opportunity and one that he can keep secret. He has gained the knowledge and has the authority to circumvent internal controls and devises a scheme to exploit those.

Amy’s company had no internal controls and as the office manager, she had access to all the bank accounts and computers. “For me, stealing money was as easy as printing checks in the accounting software test module and forging the vice president’s signature,” she says. “I then paid my personal credit card account with a company check.”

Rationalization

Most people who commit fraud in the workplace have no criminal past. They are first-time offenders and despite stealing from their companies, believe themselves to still be honest and decent people. To continue along the path of denial, they come up with ways to justify their crimes to themselves. These include: I was stealing to provide for my family; I am underpaid at work and deserve to have this money; I was going to eventually pay it back; everyone else at work steals things like office supplies and no one seems to care.

Amy worked long harder and longer hours, one of the ways she was able to justify her theft to herself. “Somehow, this made me feel less guilty and less shameful about my behavior,” she says. “I vowed to find a way to pay back the money I’d ‘borrowed.’”

There are great lessons to learn about how to handle fraud by looking at the fraud triangle and the behavior of people like Amy. Read next week’s column to find out what the fraud triangle tells us about how to handle fraud in the workplace. What works, and what doesn’t?

2 thoughts on “Why Fraud Occurs: The Fraud Triangle

  1. Pingback: Lessons from the Fraud Triangle | The Turnaround Authority

  2. Pingback: Stories of Unbelievable Fraud for Fraud Awareness Week | The Turnaround Authority

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s