The Fraud Triangle is a method for explaining why someone might want to commit fraud. The idea for it was created by Donald Cressey, who, among other things, contributed to the study of criminology and white collar crime. The concept of the Fraud Triangle originated from his hypothesis that trusted employees commit fraud and violate the trust that has been placed in them when:
1. They are under some form of pressure that they cannot share. Pressure can take several different forms, including gambling and drug addictions which could lead to excessive personal debt. A different form of pressure is related to status, for example, a trader looking to improve his status in the organization by improving his numbers.
2. Perpetrators recognize an opportunity to remove this pressure by illicitly abusing their position in the organization. Once an employee feels this pressure, they may see an opportunity to do something about it. These opportunities could include:
- No apparent audit trail in the organization.
- Inadequate oversight by supervisors.
- Management’s past failures to discipline perpetrators. This could lead to a lack of fear about reprisal.
- Inadequate or non-existent internal controls for detecting fraud.
3. Once they see an opportunity, perpetrators rationalize illicit actions or abuses of power so that they can remove their pressure. (Frenza 2011)
The Fraud Triangle
How can we fight the Fraud Triangle?
Employee Pressure can be difficult to identify until after a fraud has occurred. However, there are preemptive actions that an employer can take:
Criminal background check – there are a number of online services that claim to be able to conduct a national criminal background check for as little as $10 per search. They typically access large national databases to search for criminal information. However, these national databases are not necessarily complete. Data collection is usually conducted at the county level, and reporting standards and requirements vary greatly from county to county. To be thorough, these checks need to be made at the county level, which becomes more expensive. A good rule of thumb is that a good, thorough criminal background check could cost about as much as a day’s salary of the prospective employee. (Fishman 2008)
Employers can also run a Credit Check on current or prospective employees. However, they will need the employee’s name, address, social security number, and authorization in writing. The cost can vary, but is typically between $8.00 and $20.00. (Donnelly 2010). The Credit Check can help identify potential pressures that could be considered red flags, such as outstanding liens, bankruptcy/foreclosure, if the employee is using 100% of their credit, recent late fees, and significant financial activity. (Doyle n.d.)
Organizations probably have the greatest control over Opportunity. The first step is for management to lead by example. Employees will notice when management is absent or acts dishonestly. Secondly, strong procedures and control activities should be put into place. These include segregation of duties, input and data validation controls, process controls, batch controls, access controls, physical controls and authorization controls. A comprehensive audit trail needs to be implemented. Finally, the organization should be willing to hire an independent third party to analyze these controls, and make recommendations for improvements. These actions will not stop all fraud, but may discourage it. (Frenza 2011)
Unfortunately, organizations have the least control over an employee’s Rationalization for conducting fraud. It can be difficult to know what someone is thinking. One possible way to handle this is for managers to get to know their subordinates better (without being intrusive), and to be willing to give an employee some support and encouragement during a difficult time.
Donnelly, Tim. How to Run a Credit Check. December 30th, 2010. http://www.inc.com/guides/2010/12/how-to-run-a-credit-check.html (accessed April 6th, 2014).
Doyle, Alison. Why Do Employers Check Credit History? n.d. http://jobsearch.about.com/od/backgroundcheck/a/credithistory.htm (accessed April 6th, 2014).
Fishman, Nick. How Much Should a Reliable Background Check Cost? April 22nd, 2008. http://www.employeescreen.com/university/reliable_check_cost/ (accessed April 6th, 2014).
Frenza, Michael D. The Fraud Triangle – How to Keep It Out of Your Business. October 26, 2011. http://blumshapiro.com/kbarticle/the-fraud-triangle-how-to-keep-it-out-of-your-business (accessed April 5th, 2014).