The term fraud triangle was first coined by American sociologist Donald
R. Cressey who worked extensively in the fields of criminology and
white-collar crime.
The Fraud triangle is a theoretical framework designed to explain the reasoning behind a worker’s decision to commit a workplace fraud. There are three elements, sides to triangle, categorized by the effect on the individual, In order for fraud to occur, all three elements have to be present. They are:
Step 1 – The opportunity to commit fraud – Opportunity is the first side of the fraud triangle. This is when there is a situation that would allow a person to do something wrong. These are the weaknesses and lack of procedures in the system usually. An instance where someone could get their hands on money and get it out the door. For example, having the accountant signing checks. with no monthly reconciling of bank accounts or internal audits. In this stage the worker sees a clear course of action by which they can abuse their position to solve their own perceived, but not shareable financial problem in a way that it is unlikely to be discovered.
Step 2 – The pressure on the individual – When great pressure is brought to bear, people will do things you would have never thought possible. This is the motivation behind the crime and can be either personal financial pressure, such as debt problems, or workplace debt problems, such as a shortfall in revenue. The pressure is seen by the individual as unsolvable by orthodox, legal, sanctioned routes and not shareable with others who may be able to offer assistance. A common example of a perceived not shareable financial problem is gambling debt. Maintenance of a lifestyle is another common example.
Step 3 – The ability rationalize the crime – is the final stage in the fraud triangle. This is a cognitive stage and requires the employee to convince oneself to justify the planned crime in a way that is acceptable to his or her internal moral conscience. Rationalizations are often based on external factors, such as a need to take care of a family, or a dishonest employer which is seen to minimize or mitigate the harm done by their activity.
How can you stop the three sides of the fraud
triangle from forming into a disaster?
1. Build a culture that is "Zero Tolerance" towards fraudulent activities. It will target the rationalization part of the triangle
2. Setting up proper procedures and internal controls. This helps to narrow down the opportunity side of triangle.
3. Eliminate lousy environment and keep them engaged. This help to discourage the motivation part of the triangle.
Shared by - Maneesh M S, +Maneesh Muralidharanpillai, Appollo Tyres Limited
