The Fraud Triangle model provides a framework for understanding why trusted individuals commit occupational fraud, which causes organizations billions of dollars in losses annually. This type of crime is not a random event but the predictable outcome of a convergence of specific circumstances. By analyzing the psychological and organizational factors that lead to a violation of trust, the model offers businesses a structured way to identify and mitigate high-risk situations. This understanding is crucial for designing effective fraud prevention and detection programs.
The Origin and Purpose of the Model
The Fraud Triangle was developed by criminologist Dr. Donald Cressey in the 1950s, based on his research into embezzlers and other “trust violators.” Cressey’s work posited that for a person to commit occupational fraud, three elements must be present simultaneously. The model states that fraud is not committed solely by inherently dishonest people but by ordinary individuals who find themselves in specific circumstances. This theory is now foundational in forensic accounting and auditing, guiding professionals in assessing fraud risk and internal control deficiencies.
Component One: Perceived Non-Shareable Financial Pressure
The first element is the incentive or motivation that drives the individual to consider committing a fraudulent act. Cressey described this as a “non-shareable financial problem,” meaning the individual feels they cannot seek help or disclose their financial distress due to shame or fear. These pressures are often personal, such as crushing medical bills, gambling debts, or an addiction requiring a secretive source of funding. Pressure can also stem from internal sources, like the need to maintain an extravagant lifestyle or meet unrealistic company performance targets.
The non-shareable nature of the problem is a primary trigger, leading the individual to believe that a secretive violation of trust is the only solution. While often financial, the pressure can also include non-monetary incentives, such as a desire for perceived status or the fear of losing a job if performance targets are missed.
Component Two: Perceived Opportunity
The second component is the belief that the fraudulent act can be committed and, more importantly, concealed without detection. Opportunity arises when the perpetrator perceives a weakness in the organizational system that they can exploit. This element is the most susceptible to direct control by management, as it relates directly to the strength of internal controls. Common examples include a lack of segregation of duties, allowing one person to both authorize and record a transaction, or poor oversight of financial processes.
Opportunity can also stem from a management override of existing controls or an absence of policies, such as mandatory vacation requirements that would force a review of the perpetrator’s work. The individual must have access to the necessary assets or information and possess the technical skill to execute the scheme and cover their tracks. The lower the perceived risk of being caught, the more likely the individual is to take advantage of the situation.
Component Three: Rationalization
Rationalization is the psychological process through which the perpetrator reconciles their illegal behavior with their personal moral code, allowing them to maintain a self-image as an honest person. This process must occur before the fraud is committed, serving as a necessary mental bridge between the pressure and the act itself. Since the fraudster is typically a first-time offender who does not view themselves as a criminal, this self-justification step is essential.
Common rationalizations include telling oneself that the money is only being “borrowed” and will be repaid later, or that the employer deserves the loss due to perceived unfair treatment. Others may justify their actions by claiming they are underpaid and are simply taking what they are owed, or that the company is wealthy enough not to miss the stolen funds. This mental framework neutralizes the individual’s ethical standards, making the violation of trust seem acceptable under temporary circumstances.
Using the Triangle for Fraud Prevention and Detection
The value of the Fraud Triangle lies in its application to organizational risk management, providing a clear roadmap for prevention and detection efforts. Businesses can reduce the element of Opportunity by implementing robust internal controls, such as enforcing mandatory segregation of duties and conducting regular, unannounced audits. Strengthening these systemic weaknesses makes it harder for an individual to commit and conceal a fraudulent act.
Addressing the Pressure component involves recognizing and mitigating employee incentives for fraud, which is challenging to control entirely. Companies can manage this by offering confidential employee assistance programs for financial or personal issues and ensuring realistic performance targets to avoid undue stress. Minimizing Rationalization requires fostering a strong ethical culture, ensuring a clear “tone at the top,” and providing fraud-awareness training that directly confronts common justifications. By proactively managing all three elements, organizations enhance their resilience and safeguard their assets against occupational fraud.