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The Fraud Triangle Explained

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Have you ever wondered why an employee would steal from their workplace or commit fraud? An understanding of the fraud triangle helps explain why this happens.

So, what is the fraud triangle? The fraud triangle explains that for fraudulent occurrences to happen, three components should be present; namely: opportunity, pressure, and reason. When all of these are present, there is a high chance that fraud will be committed by someone. At the same time, having all of these three could also mean that fraud may be ongoing or could have already happened. After all, it is seldom that fraud happens at a moment’s notice, because most of the time it is planned and executed. Keep on reading below to find out more about the different sides of the fraud triangle.

Fraud Triangle
Source: https://commons.wikimedia.org/wiki/File:Fraud_Triangle.png

Opportunity

Opportunity gives a person a way to obtain assets or cash from an individual or a company. At the same time, this also provides the fraudulent individual with a means to cover up the occurrence of fraud.

The main target for fraud is usually cash but other valuable assets can also be targeted. Tangible assets and cash are usually the components that are easily accessible to someone. Because of this, it makes sense for a business to control access to their assets and cash to limit employees’ opportunity to commit fraud.

Below are the following reasons that can give someone an opportunity for fraud:

  • Anyone having the ability to override protocols
  • Lack of internal control
  • Too much leniency given to employees
  • Having a weak management system

Pressure

Pressure is the main reason why people steal and commit fraud. It seldom happens that people commit fraud just because they feel like it. There’s usually a deeper reason behind their actions. When someone feels cornered such as when they are experiencing personal financial pressure, they might feel that they have no way out except to commit fraud. Being under stress prevents a person from thinking rationally and coming up with another solution.

Below are the usual reasons for giving in to the pressure to commit fraud:

  • Unpaid medical bills
  • Having to support family members financially
  • Unpaid debts
  • Living beyond someone’s means
  • Having expensive hobbies or habits
  • Increased pressure to meet certain outcomes or goals
  • Making less than friends or coworkers
  • Having a bad performance review
  • Fear of getting fired or replaced in the job
  • Dealing with cut benefits or hours for work
  • Being demoted instead of promoted

Reason or Rationalization

The more that a person can rationalize their actions, the more that they will usually commit fraud. When a person is able to give themselves a reason for the fraud to occur, then they might even think that their actions are justified and not criminal.

Examples of common reasons for rationalization:

  • “I worked overtime and I haven’t been paid for it for months.”
  • “I deserve a raise and it was not given to me; therefore, I’m getting it myself.”
  • “I haven’t gotten any recognition although I dedicated my life to this business/company.”
  • “I deserve to have benefits that have been taken away from me by the company.”

Know that any or none of the reasons above may be present for fraud to occur. Fraud can be a one-time thing as well as an ongoing thing that happens over months or years. What is clear is that the more fraud is allowed to happen or that the longer the fraud goes on, then the bigger losses the business will face.

Are you looking for a way to protect your business against fraud? We might have several solutions for you! Contact us at Haywood Hunt & Associates to inquire about how our private investigative services and fraud investigators can help you.

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