A fraud triangle is simply a model for explaining the factors that cause someone to commit occupational deceit or breach of confidence.
Under this lesson, we are going to look at why and how fraud happens.
There are three (3) side of a fraud triangle, all of which need to be present for fraud to occur. These include:
- Opportunity to carry out the fraudulent act (ability to do something wrong).
- Ability to rationalize/justify the fraud that is; self deception to believe that the fraud is actually okay.
- Motivation (incentive/pressure to carry out the fraud).
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This is also known as the pressure/incentive to commit the fraud. The individual has some financial problems that he is unable to solve legally so he starts thinking of illegitimate means such as stealing cash as the only way out.
A good example of fraud due to pressure is one where a woman was ordered to pay $179,670 for embezzling from a church in Colorado Springs, Colorado.
The article states that, "A judge has ordered a former church bookkeeper to pay $179,670 in restitution...after she pleaded guilty to stealing church fund." The article goes on to say that, "According to court records, the case came to light in November when a pastor called police to the church at 4210 Austin Bluffs Parkway to report that an ex-employee had admitted to stealing $13,000. Church officials had discovered the money was missing as the result of an audit...In the letter, she stated that she used the money to pay medical bills for her daughter, who had suffered a skiing accident in Summit County in January 2009.I have no excuse but to say I was desperate. We were overwhelmed with lawyer and court bills,” the letter stated. “I kept this all to myself and tried to pay some of it off. I did not tell my husband because I was so ashamed. I really thought that I could get it paid back.”
Other examples of pressure that lead to fraud include:
- The employee has an addiction problem such as drugs, gambling or alcohol.
- The employee has bought a new home with an increasing mortgage rate.
- Desire for a status symbol such as living in a bigger house or driving posh and expensive cars.
This defines the methods by which crimes can be committed.
The opportunity for fraud can be caused by the following:
- Weak management system. This is especially caused if the company has few and weak managers.
- Inefficient and ineffective internal controls.
- No clear distinction between the duties of the workers that is: no separation of duties.
- Not reconciling the bank statements on time.
- Not having anyone look at the credit memorandums that are being issued out and verify them.
This is the ability to persuade yourself that something you otherwise know is wrong is really okay.
An example is the environment that the bosses create. Their subordinates could be like, "I know the senior managers get away with it, so the company will never suffer from this small amount."
Other examples could include:
- I was only borrowing the money.
- I have worked so hard for this organisation that I deserve a raise. That is it - just a raise.
- I was underpaid.