Wire Transfer Fraud

The Fraud Triangle – Understanding Fraud Risk

img fraud triangle

It is well established that all companies are at risk of fraud. Occupational fraud, also known as internal fraud , occurs when employees acting alone or with others deliberately steal or misuse employers’ money or assets. Understanding the psychology and circumstances behind internal fraud gives organisations a greater appreciation of where their weaknesses might lie and how to combat them.

What is the fraud triangle?

The ‘fraud triangle’ theory was initially proposed in 1953, in a paper called Other People’s Money: a study in the social psychology of embezzlement by Dr Donald Cressey. Cressey was a criminologist who interviewed 133 convicted embezzlers while they were still in prison. He found the great majority had not been exposed to predominantly criminal environments. His research concluded that three elements needed to be present for white collar crime [insert link] to be committed. 

The three elements that Cressey identified were opportunity, pressure, and rationalisation. The theory has been updated and expanded upon over the years, but the original fraud triangle hypothesis remains relevant today. 

The three sides of the fraud triangle

Pressure/incentive

Pressure, or incentive, to commit fraud can come from personal problems or outside influences. Employees with gambling, alcohol, drug, or other addictions may need money that they just do not have. Debts can lead people to steal or misuse assets. Some may see an opportunity to fool others into thinking they have more than they really do because they care about perceived status and wealth. 

Individuals may fear they may not meet company targets and could lose their job or miss a promotion. This can lead to pressure to falsify sales or accounts. For example, the pressure of reaching unrealistic targets was blamed for the Wells Fargo fraud scandal. Employees may also be at risk of corruption or bribery from outside sources.

According to the theory, for individuals to commit fraud they must believe that their problems cannot be solved legally or that talking to others would help.

Opportunity

A person who is prepared to commit fraud must perceive that they can do so without getting caught. This is likely to be due to their belief that they can exploit a position of trust, or because they do not believe that internal controls will pick up any discrepancies. Lack of supervision or properly documented processes can make it easier to commit fraud, as can poor accounting policies. 

Company culture is particularly relevant. The paper The Fraud Triangle revisited (Schuchter & Levi, 2016), suggested that “all Fraud Triangle elements are highly influenced by the corporate culture in their companies”. If company culture and values do not embrace ethics, integrity, and honesty, employees are less likely to feel that they should.

Rationalisation

An individual will rationalise their actions before committing fraud with reasoning such as they were ‘only borrowing’ and intended to pay back money they have stolen. Alternatively, they may feel that they have been poorly treated and deserve more, making it acceptable to take it for themselves. They may be afraid of repercussions for not reaching targets, such as losing their job. 

Remove elements from the fraud triangle to protect your company

If one or more elements of the fraud triangle are not present, the risks of fraud are significantly lowered. It makes sense that organisations should monitor all these elements with the aim of making it as difficult as possible for fraud to take place. 

  • Reduce pressure and know your employees

Make sure company targets are realistic and achievable to reduce the risk of accounting fraud. New employees should be screened to detect previous fraudulent behaviour. Perceived poor treatment by a company can put a person at risk. If employees feel they can talk about financial or personal issues they will not feel that the only way out is to solve the problem themselves. 

  • Reduce opportunity with internal controls and software

Organisations need robust processes to prevent those with access to funds acting unilaterally. Duties should be segregated so that checks and balances are automatically performed to highlight discrepancies in accounting or reporting, for example. 

The right software will help prevent, monitor, and detect occupational fraud. Trustpair’s systems run automatic checks of payment files and detect suspicious behaviour. They will improve the quality and safety of third-party data and increase security, particularly for procure-to-pay systems.

  • Reduce the opportunities for rationalisation

Company culture needs to promote openness and ethical behaviour. A clear fraud detection plan should make sure processes are in place to deter and detect it. All employees should receive regular training on avoiding and detecting fraud and should feel able to report it. 

Prevention is better than the cure and our software assists with reducing your risk of fraud. Please contact us to find out how we can help you and to request a demo today.

TRUSTPAIR _ FRAUD PROTECTION SOLUTION

Key Takeaways:

  • The fraud triangle looks at the psychology behind internal fraud
  • Prevention and early detection are key
  • Trustpair software will give extra security and peace of mind

La Newsletter Trustpair

Inscrivez-vous à la Newsletter Trustpair et recevez chaque semaine des conseils…

Articles liés

Le sujet vous intéresse ? Retrouvez l’ensemble des contenus autour de cette thématique.