What Is The Fraud Triangle? Elements, Examples & How To Prevent Employee Frauds
by Shahnawaz Alam Job & Career 22 August 2023
One common problem business owners face is employee fraud. At the same time, most can cover the damage thanks to the crime insurance in place. But what if the business owners knew why and how the fraud was committed? Couldn’t they have stopped it beforehand?
That is where the idea of the Fraud triangle comes in – to stop it before it happens and to roll with the punches. The solution came from Donald R. Cressey, a criminologist who created the theory of the Fraud Triangle in 1970.
This theory outlines three conditions that make an employee commit a crime without getting caught. Then, they come up with a reason to justify their actions. Three of these conditions are motivation, opportunity, & rationalization.
In this article, I have detailed all of these conditions. You will understand why employees commit fraud and how to stop it from occurring. But first, let’s learn a few things.
About Occupational Fraud
According to an estimation, businesses lose 5% of their annual revenue due to occupational fraud. The median business loss amounted to $117,000. Also, among the businesses surveyed for occupational copies, 21% of them reported having their data breached from the inside.
More data suggest that businesses lose around $50 billion each year due to employee theft every year. A massive 57% of data theft and breaches are caused by a combination of company employees and outsiders.
Statistics also show that 22% of small business owners get their data stolen, and 20% of the cases involve their employees doing it. Now, how does this affect an organization? There are both small and large cases of fraud that employers need to stay concerned about.
While smaller cases can be covered through different means, the larger scale occupational thefts can damage an organization in different ways –
- Leading to bankruptcy.
- Getting delisted from the stock exchange,
- Asset disposal.
- A massive change in the senior people in charge of the management.
These changes can directly affect the long-term success plan the organization has. It can slow down their growth and, in the worst-case scenario, lead them to bankruptcy.
What Is The Fraud Triangle?
The Fraud Triangle describes the who, why, and how of employee fraud. In the 1970s, a criminologist named Donald R. Cressey published this model that included simplified answers behind the complexity of employee fraud. It outlines three main elements that motivate an employee to commit occupational theft.
The three elements are –
It is not in an employee’s personality that allows one to detect whether they will commit occupational fraud. But, it is the circumstance that motivates one to commit fraud. The fraud triangle explains how it happens, helping employers implement precautions to stop it from occurring in the future.
Who Can Commit An Occupational Fraud?
A person committing occupational fraud is not always a shady person. In fact, they look like any other employee who has been performing at their best and is trusted by their employers. Statistics show that nine fraud offenders among 10 have no past history of fraud. More so, 55% of these employees do not have any past history of workplace misconduct.
Only 13% of fraud offenders have a recorded history of poor performance at work. All these data lead us to the realization that people committing occupational fraud do not commit it because it is in their personality. Instead, they are motivated by certain circumstances.
There is a general rule for this, called the rule of 10-80-10. 10% of these employees would never commit any fraud under any circumstance. The other 10% of the employees are actively finding different ways of committing occupational fraud. The rest of the 80% of people are between these two margins.
An employee who has been in an organization for ten years or more can suddenly commit occupational fraud if the circumstances are pressing enough. For example, their family member is suffering from a certain health condition that requires expensive treatment. This is a well-justified (on the committer’s part) circumstance to motivate them to commit fraud.
However, other more common circumstances cause employees to commit fraud. Here is an in-depth analysis of the fraud triangle. It reveals more about occupational fraud.
Fraud Triangle Elements
Here are the different elements of a fraud triangle –
Element 1: Motivation
Except for the employees who are actively looking for opportunities to commit employee fraud, most employees do not turn to employee theft unless the reason is compelling enough.
But, with the right motivation, even the most rusted employee can turn to employee thefts. However, the motivation can vary from one individual to the other. There are billions of people, and billions of them have a valid justification of their own which might not seem justified to others.
Here is a categorization of the most common motivations –
- Change of circumstances: The loss of a partner’s job or medical bill that is unaffordable otherwise.
- The feeling of being wrong is when employees feel denied their promotion or a raise.
- Survival: Employees often fall into difficult situations that would threaten their survival. Instances include inability to handle finances, debt, or unaffordable medical bills or treatment.
- Status Pressure: Feeling too compelled to match their peers in terms of earning and spending.
How To Handle The Situation?
The motivation part of the fraud triangle makes employees feel compelled to commit such frauds. This part can be identified and dealt with. Employers or a person in a leadership position can sense potential threats by spending more time with their employees.
They will learn about the hardship, family tragedy, or any crisis the employee is going through. Employers and leaders can show their empathy and ask the employee to provide help in any possible way. Providing them with support or even showing empathy can prevent employees from being motivated by such circumstances.
Element 2: Opportunity
Whatever motivation the employee might have, it does not lead to theft unless the employer creates room for opportunity. This is more of an unrealized, avoided, or neglected scenario that creates room for opportunity for occupational thefts.
No matter how desperate or determined the thief is, they cannot commit a theft unless the security is weak.
Cybersecurity and standardized processes can keep your data and operations vulnerable to such thefts. But, you cannot just have a system in place and have a sound sleep afterward. Most thefts happen even after security protocols exist. But, still, the breaches occur because of a lack of oversight, monitoring, and enforcement of the protocols.
How To Handle The Situation?
The second element in the fraud triangle, opportunity, occurs because of a few reasons –
Firstly, due to the absence of protocols, securities, or systems that would prevent such occurrences. So, it is important to have a protocol for your organization first.
Secondly, if there are such protocols, they are not as effective as they should be, hence the breach of data causing occupational theft. Now, on top of having such protocols, ensure that they are effective and capable enough not to provide an opportunity.
Thirdly, although the organization has a protocol, they do not pay enough attention to enforce its operations and use within the organization. So, enforcing the use and mandatory follow-up of these protocols for workplace operations is necessary.
Fourthly, having cybersecurity is not enough. The employer needs to monitor and maintain security from time to time. This includes frequent changes of passkeys, frequent monitoring of different processes, and finding out potential breaches.
Employers also need to have a plan for what happens after an occupational breach. The employees committing such crimes should face justified and real consequences.
Element 3: Rationalization
Just because one needs money and the safe of their employer is open, they will not just steal the money. Both motivations and opportunities may arise. But, the employee can make the call whether to commit an occupational theft.
But, the employers also can indirectly affect their justification of the act. The Rationalization part of the fraud triangle is when the employee justifies their action and denies the consequence.
An employee would not take the opportunity even though there is motivation. This is because they are concerned about hurting someone in the process. Most occupational fraudsters see their action as victimless crimes.
An example of that would be –
Many people in the accounting job usually charge a few more dollars for their hotel room expenses. They justify it as an opportunity that comes with the job.
How To Handle The Situation?
Employers can prevent employees from rationalizing such acts by adopting the right ways to run their company. This means being a caring boss with goodwill towards employees. To explain it more –
Employers can explain to their employees that reaching a specific revenue margin will allow them to provide employee bonuses, better learning opportunities, and more such benefits.
When employees realize that employers are investing the revenue for employees, they will not want to put away those extra few dollars – out of emotional attachment to the organization’s success which leads to their benefit.
Fraud Triangle: Examples Of Employee Thefts
Some of the most common examples of occupational frauds identifiable through the fraud triangle theory include –
- Unauthorized personal use or theft of company assets.
- Misuse of company resources.
- Sharing confidential company data with competitors.
- Overbilling customers.
- Double dipping.
- Misuse of the employee discount.
All of these examples occur when the employees do not see a clear and honest path to reach their personal goals through honest means. Here are a few case studies we found on employee fraud –
David Smith, a former manager at Quest Diagnostics, got himself reimbursed for more than $1.2 million in false expenses using a complex web deception. He went to the length of creating fake companies and fake invoices in their names for the supposed expenses he made on Quest’s behalf.
Employee thefts identified through the fraud triangle are not sudden or random. Here is an example – a Calgary Transit employee named David Hamilton stole close to $375,000, and he was pretty smart about it. He had been taking coins from work every day by hiding them in his bag. He was taking almost $200 every day in nickels, dimes, and quarters. This case shows the fraudster’s rationalization of a victimless crime if we see it through the lens of the fraud triangle.
Anna Susan Kosak, a bookkeeper working at an NC bookstore, was caught for embezzling $348,975. She had the ‘opportunity’ to handle the company books all by herself. Hence, she could write checks to herself and cash them out without anyone noticing.
How To Identify Employee Frauds?
Employers can take different means to identify the possibilities of fraud. Understanding the employees’ situations that could give rise to certain motivations is the first. However, here are some additional parts employers can add –
- The motivation for committing fraud can be both financial and non-financial. They can implement strong internal control and use fraud triangle accounting. Organizations with stronger internal control have lesser chances of employee fraud.
- Having strong fraud deterrence policies also help. This keeps employees aware of the consequences of their actions. They are aware of the possibility of losing their jobs and not getting a job anywhere after if they were to commit such actions.
How To Avoid Employee Frauds?
An employer can very well control employee theft if they have the following initiatives in place –
Employers can place a zero-tolerance policy for fraud. It is common for many employees to pity themselves after committing certain crimes. However, organizations should not resort to kindness and proceed with a consequence the employee in question deserves.
Surprise checks and visits can keep the employee alert and may prevent them from committing such acts to some extent. Auditors can also do fraud triangle accounting and pay surprise visits.
Companies should have compelling, true, and honorable codes of ethics or morals. More so, they need to be able to pass those on to their employees. An employer needs to ensure that they are sending the right message to their employees, and the employees need to ensure that they are following them.
According to the fraud triangle, employees face certain circumstances that motivate them to commit such crimes. Also, they have the opportunity at hand and their own reasons to rationalize their actions. But employees can prevent these recurring actions by understanding the fraud triangle.
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