Understanding the Fraud Triangle - Why People Commit Fraud

Fraud. It’s a word that can send shivers down any organization's spine.

But why do people commit fraud?

To answer this, we turn to the work of criminologist Donald Cressey, who developed a fascinating theory in the 1940s called the Fraud Triangle. Through interviews with individuals caught committing fraud, Cressey identified three key elements that combine to create a high risk of fraud.

These elements are pressure, opportunity, and rationalization. When all are present, evidence suggests that even historically honest people can be inclined to make poor decisions.

1. Pressure

Pressure is the motive behind the fraud. It’s the financial stressor or personal problem that pushes an individual toward unethical behavior. For example, someone might be drowning in debt, dealing with an unexpected medical expense, fighting addiction, or simply living an unsustainable lifestyle. While not every person under financial strain turns to fraud, Cressey found that this type of pressure often sets the foundation for misconduct.

2. Opportunity

Opportunity is the second piece of the triangle. It refers to the conditions that allow fraud to happen. Weak internal controls, a lack of oversight, or even too much trust in employees can create openings for misconduct. Opportunity also exists in marriages and other relationships where a spouse is the owner of one or more businesses, or exclusively handles household finances. Recognizing these circumstances can help individuals avoid being the victim of fraud. Without the means or ability to commit fraud, even someone under immense pressure is less likely to act.

3. Rationalization

The final piece of the puzzle is rationalization. This is how individuals justify their unethical decisions. They might convince themselves that they’re just “borrowing” funds and plan to pay them back, that the company owes them for their hard work, or that a company or indivuals somehow deserves to be a victim. Rationalization allows a person to see themselves as honest despite their dishonest actions.

Why Does the Fraud Triangle Matter?

Understanding the Fraud Triangle is essential for fraud prevention. By addressing these three factors, organizations can make it harder for fraud to occur. For instance, businesses can ease pressure by fostering open communication and offering financial wellness programs. Strengthening internal controls can limit opportunities for fraud. And fostering a strong ethical workplace culture can make rationalization much more difficult which can inversely discourage fraud and dishonest behavior.

Remember, fraud isn’t just about “bad apples”.

It’s about the conditions that allow fraud to thrive. Cressey’s insights remind us that prevention begins with understanding the “why” behind the act. By tackling the root causes, we can protect businesses, employees, and even communities from the impacts of fraud.

If you believe you or your organization may be the victim of fraud, we encourage you to contact an expert to help determine if further investigation is needed.