What is the Fraud Triangle? (Three Components Explained)Risk Management
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 figure out what leads workers to become fraudsters, they can work to prevent the fraud before it happens.
In the 1970s, criminologist Donald R. Cressey published a model called the “fraud triangle” that outlines the three conditions that lead to higher instances of occupational fraud: motivation, opportunity, and rationalization.
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 of the three conditions, 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. Nine in ten fraud offenders have no prior history of fraud, and 55% have no history of any workplace misconduct. In fact, only 13% of fraudsters have so much as a poor performance evaluation on the record.
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 motivation, rationalization, and opportunity—that will make fraud feel “worth it.” By digging into each of these three conditions, business owners can work to prevent them from affecting their employees.
Condition #1: Motivation
Save for the 10% who actively seek out 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
- 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.
Demonstrating empathy for your employees will help them see that you care about their wellbeing and 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.
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.
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.
It’s also essential to have a plan for what happens after a violation is detected. If alerts are allowed to pile up in an unmonitored inbox or if violations aren’t met with real consequences, employees are more likely to take their chances in hopes that they’ll be able to fly under the radar in the same way.
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.” 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.
But when it comes to defrauding a company, many fraudsters can convince themselves that theirs is a victimless crime. 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.”
An effective way to prevent these types of rationalizations is to champion transparency when it comes to company finances. 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 importance of a few dollars here and there.
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 you’re a caring and committed boss, you probably already employ the majority of these strategies simply because you believe it’s the right way to run your company.
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.
Let’s discuss what businesses can do to protect themselves from fraud and what it takes to create a solid policy for preventing external and internal threats.