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The Fraud Triangle: how to spot fraudulent behaviour

3 min read | 19 December, 2017 By Melissa Jones


Most staff are honest and will carry out their jobs to the best of their ability. But very occasionally you might fall victim to one who isn’t quite so trustworthy. Before you know it, they’ve been living the high life on your hard-earned turnover.

Fraud costs companies millions of pounds each year and sadly, some of that fraud is committed by employees. But fraud isn’t normally a random act and there will be reasons why an employee perpetrated the crime. The fraud triangle is a model used to explain the behaviour and what motivated the employee to act that way.

What is the fraud triangle?

As the name suggests the fraud triangle is made up of three parts – pressure, rationalisation and opportunity. The theory of the fraud triangle was created by American criminologist Donald Cressey to explain what leads people to fraud or unethical behaviour. If organisations can understand the reasoning behind criminal or unethical acts, then they will be able to work more effectively against acts which will negatively affect their organisation.

The three elements of the fraud triangle

Pressure – People don’t usually commit fraud simply for the hell of it. There is usually some pressure behind it that in effect, forces people’s hand. This could be financial pressure. For example, they may have lots of debts, a gambling, drug or alcohol habit or be under pressure from partners to achieve a certain lifestyle or monetary income. It could also be emotional pressure from family members or friends and a fraudulent act almost becomes a pressure release valve for them. In addition, the pressure they are under might seem odd or downright bizarre to an outsider but it will be present.

Greed can also be a pressure in a sense but usually it is linked to some kind of perceived injustice such as “I didn’t get the bonus I deserved” or “I was overlooked for promotion”.

Rationalisation – Before they commit a crime people will justify to themselves why it is acceptable to go down that route. The example above is a prime one – people feel they have been cheated or hard done by and are therefore justified in ripping off their employer. Some might view the fraud as merely “borrowing” goods or money while others see it as payment they’re owed. Others might justify it by saying the fraud occurs against a large company which is well equipped to absorb such a loss so it doesn’t matter.

Opportunity – People have to have the opportunity to commit crime. Provided the pressure and rationalisation are present, then staff will look for the opportunity to commit a fraud. It might be a case of a temporary situation where the risk of being caught is low or they may have access to banking details, cheque books, passwords etc. which make it easy for them to commit a fraud. Goods might not be inventoried regularly or not be locked away making it easy for staff to pilfer without anyone noticing. If you’re not actively trying to prevent fraud there are plenty of opportunities that arise for dishonest staff to take advantage of.

How to spot fraudulent behaviour

You don’t want to doubt your workers’ honesty but you need to look out for clues of fraudulent behaviour. If you don’t believe it can happen in your organisation and you think trust is enough, it’s all too easy to dismiss red flags as administrative errors. These tell-tale signs don’t necessarily indicate guilt or innocence but they will encourage you to take a closer look at the individual in question.

  • Does your employee have known financial pressures or gambling, alcohol or drug addictions? Do they have a reputation for taking risks, or speculating on investments?
  • Do they refuse to take holiday time or work with other colleagues? Do they work outside of normal hours when they don’t need to, especially if they work in accounting and have authority to make or receive payments?
  • Have you noticed changes in their lifestyle? Are they suddenly a lot better off, driving a nice car or flashing the cash?
  • Do they deflect questions around profligate spending with an excuse about an inheritance or lottery win? Some dishonest employees will have an excuse such as these lined up.
  • Discrepancies in accounting such as payments not matching the account payee details or your general ledger can be an indicator.
  • Are there multiple payments for similar or identical amounts close together but to different payees? One might be to pay a legitimate expense, another might be fraudulent.
  • Is there a lack of separation of duties and power in your business? Are certain staff in several key positions?
  • Do they have unusually close relationships with auditors or clients? If so, they may merit a closer look.

Using the fraud triangle to prevent criminal behaviour in your staff

Just as the fraud triangle can identify behaviour, you can use the three aspects to minimise criminal behaviour.

Reducing pressure – Your role is as an employer, not family member, so there is a limited amount you can do to alleviate personal pressures. However, you can have an impact on money to an extent or identify anyone with a substance problem and point them in the direction of help.

Take away opportunity – Much fraud is opportunistic so make sure your processes are controlled. If there are checks and balances in place e.g. batch payments have to be checked by another staff member against purchase orders, then the chance of fraud is reduced. Analyse your operations and review your internal controls.

Deal with rationalisation – Don’t give employees the chance to justify fraudulent behaviour in the first place. Take a zero-tolerance approach to fraud and make sure employees and clients know this is the case. You might wish to include this in employment contracts or staff handbooks. Make staff aware of the cost of fraud to your business and the severe consequences of committing any fraud.

Posted on 19 December, 2017

By Melissa Jones

in Business Process

Tag Business Process

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