Understanding The Fraud Triangle: The Motivation, Opportunity, And Rationalization Behind Fraudulent Acts
The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. In the evolving landscape of digital business, the empowerment of individuals over their personal… Her experiments show how people rationalize behaviour when they have opportunity and motive to act unethically.
- In the context of fraud rationalization, individuals may justify their unethical actions by aligning them with culturally accepted practices or beliefs.
- From the lens of a corporate executive, the relentless pursuit of success and the fear of failure can create a breeding ground for rationalization.
- It is a process that underscores the importance of vigilance and integrity at every step, highlighting the need for strong ethical guidelines and a culture that promotes accountability.
- Professor Pamela Murphy has studied this mental component of fraud and concluded that many of us—maybe most of us—are capable of rationalizing fraud under the right circumstances.
- For example, an employee might rationalize embezzlement by arguing that they deserve more for their contributions, especially if they view executive compensation as disproportionately high.
- The fraud triangle is therefore an important conceptual tool for highlighting environments that are conducive to fraud.
The fraud triangle is a model showing the conditions that increase the likelihood of fraud being committed. The three components of the fraud triangle are perceived pressure, opportunity, and rationalization. It will not necessarily allow you to know which frauds were prevented, but you will be less likely to be shocked by a betrayal. Whenever the fraud incident occurs, the need to look at the situation from the fraudster’s perspective is important. The annual surveys of employee attitudes and evaluations of the ethical climate recommended by Breaking the Cycle must be professionally designed to avoid leading questions. Surveys must also be administered anonymously to encourage truthful responses that will be helpful in assessing the ethical climate of the organization and the effectiveness of the ethics program.
Pressure
Ethical boundaries are often perceived as universal, steadfast principles that guide moral conduct. However, the reality is that these boundaries are significantly influenced by cultural norms and values. In the context of fraud rationalization, individuals may justify their unethical actions by aligning them with culturally accepted practices or beliefs.
Understanding the Fraud Triangle: The Motivation, Opportunity, and Rationalization Behind Fraudulent Acts
Accordingly, careful attention must be paid to rationalizations that make fraud possible. As the research of Sutherland and Cressey pointed out, even individual acts of fraud are rarely the direct result of inherent personal traits, but rather are highly influenced by conditional environmental factors. The fraud triangle is therefore an important conceptual tool for highlighting environments that are conducive to fraud. By imposing stronger internal controls and processes, companies can take specific, visible action to reduce the risk of opportunity.
The personality, knowledge, and temperament of the fraudster enable them to confidently commit the frauds and they are not the frightened people. There may be also the possibility that good people may fall into the bad company of the criminals who make them commit the frauds in the working places or the companies where these good people are employed. The metric chosen to represent company performance is total shareholder return (TSR) calculated on an annual basis and compared to the TSR of a peer group of companies. But this rule will only reinforce the existing focus on short-term financial goals and targets.
The Fraud Triangle: Incentive, Opportunity, and Rationalization
Sharing it with others would risk exposing the perceptions underlying the rationalization and make it impossible to keep them. By the same token, the rationalization side of fraud is very difficult to detect and prevent. We recently received a call from a small business owner who had just discovered that a long time employee had been stealing from his business. The crafty scheme involved fictitious vendors and false invoices that resulted in checks being written to accounts belonging to the employee and his girlfriend. The thief (or thieves, as it turned out) was a trusted employee, of course, but rationalized taking the money so he could “support his family.” That is, support the family with luxury items, vacations, gadgets, and goodies.
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- It’s a multifaceted approach that requires commitment from all levels of an organization and a willingness to look beyond short-term gains for the long-term health of the company and society at large.
- From a psychological standpoint, this involves a complex interplay of cognitive dissonance, self-deception, and ethical fading.
- These profiles are not monolithic; they vary widely, encompassing a range of personalities from the seemingly honest to the overtly corrupt.
This latter situation can trigger expectations for a better lifestyle, perhaps involving a sports car, foreign travel, or a larger house. Todd is a Principal at SVA Certified Public Accountants and works with closely-held businesses in the manufacturing, distribution, and construction industries. His specialties include offering assurance services (audits, reviews, compilations, forecasts, and projections), mergers and acquisition services, fraud and litigation support services, and outsourced CFO services. Schneider Downs Business Consulting delivers sophisticated consulting services to meet the complex needs of today’s business environment.
The reasons for hesitating are because they have a significant fear of retaliation or because they believe that senior management is involved or won’t take any action to stop unethical behavior. There are some legal protections for whistleblowers in some states and some industries. Understanding the psychological profiles of individuals who rationalize fraud is crucial in the realm of forensic psychology and criminology. These profiles are not monolithic; they vary widely, encompassing a range of personalities from the seemingly honest to the overtly corrupt. The common thread among them is the cognitive dissonance they experience when their actions do not align with their self-perception or societal norms. These tactics are not justifications in the traditional sense but are psychological mechanisms that allow individuals to commit fraud without viewing themselves as “fraudsters.”
During a financial crisis, for instance, an employee might justify falsifying expense reports as necessary to protect their job or the company’s survival. This self-justification is further enabled when organizations lack a robust ethical framework, allowing rationalization to thrive unchecked. In such environments, even minor control lapses can escalate into significant fraudulent activities. To identify incentives that are conducive to fraud, researchers look at the relationship between structural incentives, such as executive compensation structures, and incentives to engage in fraud.
She saw numerous rationalizations during her 20 years in the business world, where she worked as an auditor, controller, marketing manager and management consultant rationalizing fraud in Minneapolis, Chicago and the U.S. upper Midwest. Reviewing internal marketing reports, for example, she noticed huge bumps in sales figures towards year end, a tip-off that fat bonuses were being paid out. An additional issue that is needed for fraud to continue over a period of time is the ability of the perpetrator to rationalize the situation as being acceptable. For example, a person stealing from a company’s petty cash box might rationalize it as merely borrowing, with the intent of paying back the funds at a later date.
Why Is Fraud Committed?
Since maintaining social status is a common motivator in committing fraud, they must keep their crime a secret. Getting caught committing fraud to cover up their financial problems is just as bad as the financial problems themselves, so their method must be foolproof. Examples of financial issues include the inability to pay bills, having a drug or alcohol addiction, or wanting status, such as a bigger house or fancy car. The fraud triangle represents the factors that go into a person’s decision to commit fraud in the workplace. Developed by Dr. Donald Cressey, this model focuses on his research of people who were caught embezzling.
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Without appropriate and robust processes and controls, the operations of the company or organizations may not be run, causing various losses to the company such as operational, reputational, and financial losses. The financial position of the company deteriorates without appropriate internal controls. This can stem from financial strain, unrealistic performance targets, or personal obligations.
From the lens of a corporate executive, the relentless pursuit of success and the fear of failure can create a breeding ground for rationalization. The pressure to meet targets and the dread of disappointing stakeholders can warp one’s ethical judgment, leading to a justification of fraudulent acts as a necessary evil for the greater good of the company. For instance, consider the case of a CFO who manipulates financial statements to meet earnings expectations.
Moral flexibility is a concept that refers to the capacity of individuals to adjust their moral standards in order to align with their current goals, desires, or circumstances. This adaptability can sometimes lead to the justification of actions that would otherwise be considered unethical or fraudulent. The phenomenon is particularly relevant in the context of fraud rationalization, where individuals may bend their moral rules to justify their means. From a psychological standpoint, this involves a complex interplay of cognitive dissonance, self-deception, and ethical fading.