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The Fraud Triangle

The fraud triangle consists of three elements that must be present for fraud to occur: pressure, opportunity, and rationalization. Pressure includes financial pressures like debt or losses that motivate fraud as a solution. Emotional pressures like resentment or greed can also play a role. Opportunity means having the means to commit and conceal the fraud, such as access to assets or ability to manipulate records. Rationalization is the mindset that allows someone to justify committing fraud, such as through attitude, finding justifications, or lacking integrity.

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1K views2 pages

The Fraud Triangle

The fraud triangle consists of three elements that must be present for fraud to occur: pressure, opportunity, and rationalization. Pressure includes financial pressures like debt or losses that motivate fraud as a solution. Emotional pressures like resentment or greed can also play a role. Opportunity means having the means to commit and conceal the fraud, such as access to assets or ability to manipulate records. Rationalization is the mindset that allows someone to justify committing fraud, such as through attitude, finding justifications, or lacking integrity.

Uploaded by

shierley rosalina
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The Fraud Triangle

For most predatory fraud perpetrators, all the fraudster needs is an opportunity and the criminal
mind-set that allows him/her to commit the fraud. For most first-time fraud perpetrators , Three
conditions that are present when fraud occurs: a pressure, an opportunity, and a rationalization. This
is referred to as the fraud triangle, and is the middle triangle in figure 5-1

PRESSURE
A pressure is a person’s incentive or motivation for committing fraud. Three types of pressure
that lead to misappropriations are shown in the employee pressure triangle in Figure 5-1 and are
summarized in table 5-2.
Financial pressures often motivate misappropriation fraud by employees. Example of such
pressures include living beyond one’s means, heavy financial losses, or high personal debt. Often the
perpetrator feels the pressure cannot be shared and believes fraud is the best way out of a difficult
situation. For example, Raymond keller owned a grain elevator where he stored grain for local
farmer. He made money by trading in commodities and built a lavish house overlooking the des
moines river. Heavy financial losses created a severe cash short age and high debt. He asked some
farmers to wait for their money, gave other bad checks, and sold grain that did not belong to him.
Finally, the seven banks to which he owed over $3 million began to call their loans. When a state
auditor showed up unexpectedly, Raymond took his life than face the consequences of his fraud.
A second type of pressure is emotional. Many employee frauds are motivated by greed. Some
employees turn to fraud because they have strong feelings of resentment or believe they have been
treated unfairly. They may feel their pay is too low, their contributions are not appreciated, or the
company is taking advantage of them. A California accountant, passes over for raise, increased his
salary by 10%, the amount of the average raise. He defended his actions by saving he was only taking
what was rightfully his. When asked why he did not in crease his salary by 11%, he responded that
he would have been stealing 1%.
Other people are motivated by the challenge of “beating the system” or subverting system
controls and breaking into a system. When a company boasted that its new system was
impenetrable, a team of individuals took less than 24 hours to break into the system and leave a
message that the system had been compromised.
Some people commit fraud to keep pace with other family members or win a “who has the most
or best” competition. A plastic surgeon, making $800.000 a year, defrauded his clinic of $200.000 to
compete in the family “game” of financial one-upmanship.
Other people commit fraud due to some combination of greed, ego, pride. Or ambition that
causes them to believe that no matter how much they have it is never enough. Thomas coughlin was
a vice-chairman of Walmart and a personal friend of founder sam Walton. Even though his annual
compensation exceeded $6 million, over a five-year period he had subordinates create fictitious
invoice
1. Pressure
A pressure is a person’s incentive or motivation for committing fraud.
a. Motivation or incentive to commit fraud
b. Types:
- Employee
 Financial
 Emotional
 Lifestyle
- Financial
 Industry conditions
 Management characteristics
2. Opportunity
- Commit
- Conseal
- Convert
3. Rationalization
- Attitude
- Justification
- Lack of personal integrity

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