The Fraud Triangle is a theoretical model used to understand and explain the factors that cause individuals to commit occupational fraud. Introduced by criminologist Donald Cressey, the Fraud Triangle identifies three primary components that must be present for fraud to occur: pressure/incentive, opportunity, and rationalization. Organizations employ various measures, such as Segregation of Duties (SoD), to mitigate the “opportunity” factor of the triangle.
Components of the Fraud Triangle
Pressure/Incentive
This component refers to the motivation or incentive for committing fraud. It can stem from financial difficulties, addiction, personal debt, or the desire to achieve higher performance results.
Opportunity
Opportunity refers to the situation or environment that allows fraud to occur. Weak internal controls, lack of oversight, and inadequate auditing procedures can create opportunities for fraudulent behavior. Segregation of Duties (SoD) is a key strategy employed to minimize this risk by ensuring that no single individual has control over all aspects of a financial transaction.
Rationalization
Rationalization is the mental process by which a fraudster justifies their fraud as acceptable. This may involve self-deception or a belief that the actions are for a greater good or that the organization owes them.
Historical Context
Donald Cressey, an American criminologist, introduced the Fraud Triangle in his 1953 book, “Other People’s Money: A Study in the Social Psychology of Embezzlement.” Cressey’s work laid the foundation for modern fraud prevention and internal control systems within organizations.
Applicability of the Fraud Triangle
The Fraud Triangle is widely used in various sectors, including finance, banking, and corporate governance, to assess and prevent the risk of occupational fraud. It provides a framework for developing stronger internal controls and for understanding the psychological aspects of fraud.
Comparisons and Related Terms
Fraud Diamond
An extension of the Fraud Triangle, the Fraud Diamond adds a fourth component—capability—to the original model. The capability factor emphasizes the individual skills, position, and abilities required to commit and conceal fraud over an extended period.
Segregation of Duties (SoD)
A critical internal control measure that aims to reduce the risk of fraud by dividing responsibilities among different employees. This prevents any single individual from having control over all aspects of a financial transaction.
FAQs
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References
- Cressey, Donald R. “Other People’s Money: A Study in the Social Psychology of Embezzlement.” Glencoe, IL: Free Press, 1953.
- Association of Certified Fraud Examiners (ACFE). “The Fraud Triangle.” Retrieved from [website URL].
Summary
The Fraud Triangle offers a comprehensive understanding of the factors that lead to occupational fraud, encompassing pressure/incentive, opportunity, and rationalization. This model is crucial for developing effective fraud prevention strategies and enhancing organizational integrity. By leveraging internal control measures such as Segregation of Duties (SoD), organizations can significantly reduce the risk of fraud.
