Skip to 0 minutes and 1 secondSo, why are people motivated to commit fraud? This can best be explained through Donald Cressey's Fraud Triangle. According to Cressey, there are three factors that must be present in order for fraud
Skip to 0 minutes and 11 secondsto exist: pressure, opportunity, and rationalization. We talk about pressure. Pressure is what motivates an individual to engage in fraudulent activity. The individual has a financial problem and is unable to solve that problem through legitimate means. And crime is seen as the only way to solve that problem. The problem may be personal in nature. Maybe they have bills they can't pay.
Skip to 0 minutes and 34 secondsOr they have a vice they need to support: gambling, drug abuse, something along those lines. It could also be professional in nature. It might be that they have a lot of pressure to perform at a certain level, or that the financial statement numbers are tied to their performance. Opportunity. Opportunity defines the method by which the crime can be committed. So a person uses their position of trust to get around the checks and balances that may exist in the accounting system. And they probably don't think they're going to get caught. Rationalization. That's the way the individual will justify his or her crime. Rationalization includes -- maybe they think they're underpaid. Maybe they think that the company deserves it.
Skip to 1 minute and 17 secondsAnd maybe they even think they can pay the money back somehow. If one element is removed from the Fraud Triangle, it is impossible for fraud to exist. So removing pressure, removing opportunity, removing rationalization. So how should companies do that?
Skip to 1 minute and 36 secondsThey could put in employee support programmes to help their employees deal with those personal vices and struggles that they may have. They could advance their employees' paychecks, let them get their paycheck a little early. It might be all that the employee needs to pay their bills so they don't choose to engage in fraudulent activity.
Skip to 1 minute and 59 secondsStrengthening internal controls is the primary way to reduce opportunities. Within the accounting system, a company puts in enough checks and balances within their processes and procedures to ensure that fraud cannot exist. Creating a proactive fraud policy that the company has, separate from their code of ethics, but it discusses how they will handle fraud when it's found in the company. Encouraging tips. Creating a mechanism that allows employees to report when they think fraud is occurring within the organization. And also encouraging mandatory vacations -- making sure that your employees take the vacations they are entitled to -- because it's a lot harder for fraud to occur and continue to occur if the employee perpetrating the fraud is not actually at work.
Skip to 2 minutes and 48 secondsCreating a good corporate culture, where your employees feel like they're well-paid and respected. It's very hard for someone to perpetrate fraud against an organization that they actually respect. And also, creating a code of ethics with specific qualifications and consequences of dishonest behavior. Again, if just one element of the Fraud Triangle is taken away, it is impossible for fraud to exist.
The Fraud Triangle
What convinces an ordinary person to commit fraud? How does that person justify this criminal behavior?
In this video, we explore these questions by looking at the Fraud Triangle, which describes three elements which enable fraudulent activity.
© Kogod School of Business, American University