Fraud experts have long suggested that the presence of three conditions, known as the “fraud triangle,” greatly increases the likelihood that an employee will commit fraud. Over the years, this conceptual framework has been expanded to become a “fraud diamond.” Understanding these models can help you protect your business.
The classic fraud triangle consists of:
- Pressure. An individual experiences some type of pressure that motivates the fraud. Pressure can come from within the organization — for example, pressure to meet aggressive earnings or revenue growth targets. Or, the pressure could be personal, such as the need to maintain a high standard of living or pay off debt from credit cards, medical bills or gambling.
- Rationalization. Perpetrators must be able to mentally justify their fraudulent conduct. They might tell themselves that they’ll pay back the money before anyone misses it, or reason that:
- They’re underpaid and deserve the stolen funds,
- Their employers can afford the financial loss,
- “Everybody” does it, or
- No other solution or help is available for their problems.
Under the fraud triangle theory, most employees who commit fraud are first-time offenders who don’t view themselves as criminals but as honest people caught up by circumstances.
- Opportunity. Occupational thieves exploit perceived opportunities that they believe will allow them to go undetected. Poor internal controls, weak management oversight and ineffective or nonexistent audits all create opportunities for fraud. The opportunity leg represents the best avenue for preventing fraud because it’s within your organization’s control.
More recently, experts have proposed a conceptual framework that includes a fourth leg, “capability.” A capable individual is someone who may have the job position, intellectual capacity, confidence, resilience to stress and guilt, and ability to coerce and cajole others that make committing fraud easier.
A similar model to this diamond shape is MICE (Money, Ideology, Coercion and Ego). MICE retains the original three sides of the fraud triangle but shares the opportunity leg with a second triangle that also has sides for criminal mindset and arrogance.
Proponents of this model argue that perpetrators with characteristics matching the original fraud triangle are “accidental fraudsters.” This means that they wouldn’t commit fraud in the absence of motivation. Those on the side of the additional criminal mindset/arrogance/opportunity triangle are predators, or pathological fraud perpetrators. These individuals require only opportunity. This is another reason why focusing on the opportunity side is the best way to prevent fraud in your organization.
Designed to help
It’s important to remember that employees who seem to display fraud triangle or diamond characteristics won’t necessarily commit a crime. The models are designed to identify risk and eliminate fraud opportunities. Contact Ashley Lee, CPA, CFE at email@example.com for more information about protecting your organization from fraud.