Use the Fraud Triangle, developed by sociologist Donald R. Cressey, to spot and prevent fraud from within your own organization.
Occupational fraud, also called internal fraud, is a big threat to companies of every size. Whether it’s an employee at a coffee shop taking money out of the register, or an executive misusing their influence in business-related transactions for personal gain, every organization is at risk of becoming a victim.
Sociologist Donald R. Cressey developed a model that quantifies and maps out the three elements of occupational fraud called the Fraud Triangle, and the model has been used ever since in discussions about fraud prevention.
Pressure, opportunity, and rationalization make up the three sides of the triangle, and each component of the triad feeds into the next. Below, we’ll examine what each individual side means and how you can use the Fraud Triangle to prevent fraud in your organization.
Pressure
Pressure serves as the driving motivation for a person to commit occupational fraud. The “pressure” in this case is usually of a financial nature. Mounting unpaid bills, inability to maintain a desired lifestyle, addiction, etc. are external forces that cause stress to the fraudster and drive them to commit to what most would see as extreme measures.
One of the common characteristics of this pressure is that it’s usually not related. The pressure is often coming from the personal aspect of the criminal’s life and thus coworkers and supervisors are often completely unaware of it.
However, there are cases where the pressure is coming from the job. High demands for meeting financial targets or performance-related bonuses can be the motivation for fraud. Supervisors in these situations need to be aware of the pressure they’re putting onto their employees and the risks they might present in terms of occupational fraud.
Opportunity
Opportunity is the next factor in occupational fraud. It refers to any situation where an employee has access to funds or assets in a way that isn’t monitored by security procedures or personnel. For instance, a lone employee with access to a cash box, or a single person being in charge of financial reporting with nobody else to verify the information.
The more opportunities an employee who is feeling financial pressure has to commit fraud, the more likely it becomes that they will.
Rationalization
Perpetrators of fraud often don’t consider themselves to be bad people. They use rationalization to work around any ethical concerns they might have in order to justify their crimes.
Rationalization can come in the form of bargaining with their conscience, i.e. “I’ll pay it back later when I’m doing better financially.” This leads to the fraudster initially viewing their behavior as just taking a loan from company funds, however unlikely it is that they’ll ever actually pay it back.
Rationalization can also appear in the form of victimization. “This company doesn’t appreciate me and treats me badly, so I deserve this money as compensation.” In these cases, the fraudster convinces themselves that they are entitled to the money to balance out what they perceive as injustices wrought against them.
Lastly, if a fraudster sees their own superiors engaging in what they feel to be unethical behavior, they might simply rationalize that nobody will be that upset about stolen funds. They feel that ethics are unimportant in their workplace.
Using the Fraud Triangle to Prevent Occupational Fraud
The Fraud Triangle is a tool that can be used for prevention. By understanding each of the triangle’s aspects, supervisors and security personnel are able to keep an eye out for warning signs.
If an employee seems to feel financial pressure, whether it’s from internal or external pressures, they might be a candidate for committing fraud. Talking to them about their problems and aiding them to seek help could mitigate the risk before they resort to criminal actions.
Opportunities should be sought out and rectified with security protocols. For instance, the same person shouldn’t be solely in charge of handling mail, depositing checks, and preparing billing without direct oversight from a supervisor or having a second employee check numbers. Internal controls are key for all financial operations within a workplace.
Companies can hire external third-party organizations to conduct operational reviews to identify points of vulnerability for internal fraud.
As far as the rationalization aspect is concerned, the best way to combat this is to create and foster a company culture that promotes ethics, treats employees fairly, and observes a strong work/life balance for everybody involved.
Other tactics that have been proven to work against occupational fraud are setting up anonymous hotlines for tips from coworkers and offering rewards for whistleblowers. All complaints should be taken seriously and thoroughly investigated.
Protection Against the Fraud Triangle
While vigilance, communication, and observation are the best tools for preventing and spotting occupational fraud, there are tools that can help. Fraud.net’s comprehensive fraud prevention tools include protection against insider threats.
Having the best tools on your side can be the difference that counts when it comes to fraud. Contact Fraud.net for a free demo today.