What is the fraud triangle? (Three components explained)

It’s not difficult to see why business owners want to understand the mindset behind employee fraud. Crime insurance can cover losses once they’ve happened, but if owners can understand what leads workers to commit fraud, they can likely prevent the fraud from occurring in the first place.

In the 1970s, criminologist Donald R. Cressey published a model called the “fraud triangle.” The fraud triangle outlines the three conditions that typically lead to higher instances of occupational fraud: motivation, opportunity, and rationalization.

To put it simply, when an employee has a reason for committing fraud, gets a chance to do so without getting caught, and can come up with a justification for their behavior, they’re more likely to commit an occupational crime.

Read on to learn more about each condition of the fraud triangle, why they contribute to fraud, and how you can prevent them from occurring within your workforce.

Who commits fraud?

The stereotypical fraud offender looks a lot like any other high-performing, trusted employee. According to a 2024 report by the Association of Certified Fraud Examiners, 84% of employees who committed fraud had no prior criminal history on their background checks. This means that the vast majority of fraudsters have never committed a crime before.

It’s circumstances, not personality traits, that lead people to commit fraud. In fact, the National Association of State Auditors, Comptrollers, and Treasurers claims that most people could be incentivized to commit fraud under the right circumstances.

This estimate is called the “10-80-10 Rule.” It states that just 10% of people would never commit fraud for any reason, another 10% of people are actively looking for opportunities to commit fraud, and the remaining 80% fall somewhere in between.

Members of this middle group aren’t fraudsters by nature, but neither are they steadfast in their commitment to a life free of crime.

For example, an employee with a stellar ten-year record may suddenly be able to justify embezzlement after their child is diagnosed with a serious illness that requires otherwise unaffordable treatments. 

Each person has a different set of circumstances — a different combination of fraud triangle components (motivation, rationalization, and opportunity) — which will make fraud feel “worth it.”

By digging into each fraud triangle condition, business owners can work to prevent them from affecting their employees.

Which type of employee is the most likely to commit fraud?

Employees in management positions are the most likely to commit fraud, accounting for 41% of all cases. That said, while owners and executives are only responsible for 19% of all fraud cases, these fraud cases have the highest median loss at half a million dollars.

Condition #1: Motivation

Save for the 10% who actively seek opportunities to commit fraud, most people won’t turn to employee theft without a compelling reason.

However, the right motivation can tempt otherwise trustworthy employees to consider cheating their employer.

What one person feels is a valid justification might not be compelling to another. There are as many different motivations for fraud as there are people in the world, but they can be sorted into a few main categories:

• Sudden changes in circumstances: A partner’s job loss, a surprise medical bill
• A sense of being wronged: Being passed over for a promotion or denied a raise
• Personal incentives: Gambling addictions, costly divorce, and lawsuit settlements
• Survival: Inability to afford life-saving medicines or to put food on the table
• Status pressure: Feeling compelled to keep up with peers’ earning or spending

Your ability to understand your employees’ potential motivations for fraud relies on how well you know them. When you spend time with staff, you’re more likely to notice sudden changes in behavior or countenance that might signal a personal hardship or family tragedy, and you’ll have an opportunity to ask what you can do to help. 

How to prevent motivation-based fraud

Demonstrate empathy for your employees to help them see that you and the company care about their wellbeing. Let your staff know that you are willing to offer the help and support they need in good times and in bad. With a supportive employer at their back, workers have far fewer reasons to turn to fraud — and are therefore less likely to do so.

Condition #2: Opportunity

Perhaps the easiest piece of the triangle for business owners to control is opportunity. No matter how disgruntled or desperate your employees might feel, they can only commit fraud if they’re given the chance to do so.

What causes opportunity-based fraud

Many different things can open the door for fraud within your company. Here are a few things to look out for and address to prevent opportunity-based employee theft or embezzlement from occurring:

• Lack of supervision: Employees feel like they can easily get away with committing fraud because they are not supervised or monitored properly.
• Inadequate internal controls: Systems are not in place to deter fraud, making it more difficult to commit the crime, such as segregation duties and regular internal audits.

How to prevent opportunity-based fraud

To prevent this type of opportunity-based fraud, the company should implement several key controls, such as:

• Segregation of duties: Separate the responsibilities for adding new vendors, processing invoices, and authorizing payments to ensure no single employee controls the entire process.
• Regularly audit sensitive departments: Conduct periodic audits of internal systems and payment transactions to identify any unusual patterns or inconsistencies.
• Vendor verification: Independently verify new vendors before adding them to the system. This can include thorough background checks and validation of their business credentials.
• Approval controls: Require authorization from superiors for payments above certain thresholds to ensure that no single employee can approve a payment without oversight.

Standardized processes and rigorous oversight procedures are key to keeping your operations invulnerable to fraud. However, it’s not enough to just put these systems in place: the opportunity for fraud still exists if security protocols are present but unmonitored, ineffective, or unenforced.

Particularly when it comes to fraud that relies on cybersecurity access, you’ll need to test and adjust your security standards frequently to keep them effective.

It’s also essential to have a plan for what happens after a violation is detected.

Condition #3: Rationalization

The final piece of the fraud triangle is rationalization. Even when people have motivation and opportunity, most will not choose to act unless they can justify to themselves why their fraud is “okay.” The fact of the matter is that fraud is rightfully frowned upon, so most employees are not going to commit the crime.

Even those who could be incentivized to break the law given the right motivation usually wouldn’t be willing to do so if it meant they were harming someone else.

What causes rationalization-based fraud

When it comes to defrauding a company, many fraudsters can convince themselves that theirs is a victimless crime.

For example, an accountant who sees how much their sales department spends entertaining potential clients may justify skimming a few dollars here and there for themselves.

Or an account lead on a work trip might charge unnecessary extras to their hotel room because “everyone does it; it’s one of the perks of the job.”

Additionally, employees may justify fraud because of a “Robin Hood complex.” They feel they have been wronged by the company in some way, which helps them to view the company as the “bad guys.” Therefore, in the eyes of the fraudster, their criminal actions are in the name of the greater good.

How to prevent opportunity-based fraud

An effective way to prevent these types of rationalizations is to champion transparency when it comes to company finances. You should set clear expectations and boundaries for spending and outline consequences for breaking these expectations. This gives your staff a clear understanding and prevents them from taking advantage of these systems.

For example, if you explain to your staff that holiday bonuses depend on the company’s ability to hit a certain profit margin, employees will have a better understanding of the severity of skimming a few dollars here and there.

Additionally, when employees witness the company’s profits being reinvested in its workforce, they’re more likely to engage emotionally in the success of the team. If the company hits profit targets, show your gratitude to your employees to make them feel appreciated. You can give out bonuses or take your staff on an all-expenses retreat. You’d be surprised how far a small amount of gratitude can go in preventing fraud or disgruntlement. 

You shouldn’t need the threat of potential fraud to motivate you to spend time with your employees, champion standards of fairness, and practice open communication and transparency.

The fact that these things may also keep your company from falling victim to employee theft is just a bonus.

Next up, make sure to read our guides on employee dishonesty insurance coverage (to help you stay protected from theft) and how to conduct proper employee theft investigations.