Fraud conjures ideas of the Bernie Madoffs, Charles Ponzis, and Jeffrey Skillings of the world.

While the largest cases in history have been the ones to make the news, fraud is a relevant threat to companies of all sizes in all industries. According to criminologist Donald Cressey, if three elements are present, fraud becomes a grave risk. These are: perceived pressure, perceived opportunity, and rationalization.

In many cases, crossing the line of ethical conduct to moral turpitude is due to financial need and its corresponding pressure. Medical bills, addictions, and lifestyle maintenance are among the most common pressures leading to fraudulent behavior. Greed itself may be motivation for some, but the need to financially support oneself, family, and loved ones can be enough to sway morality.

In other cases, fraud is not for financial gain but simply to cover for poor performance on challenging – often unattainable – goals set by management. Although management cannot be held completely responsible for the acts of their employees, the next leg of the fraud triangle, perceived opportunity, provides the most control to employers.
Potential fraudsters must believe they can get away with fraud before execution is considered. This may be due to a lack in segregations of duties, poorly implemented controls, lack of management oversight, authoritative position abuse, or an environment conducive to unethical behavior. Implemented, yet unexecuted deterrence measures, allow employees on the verge to break through the threshold of mere hypothetical thought. Although “setting an example” may seem cliché, it is absolutely necessary to deliver consistent consequences based on written and communicated policy.

Once an employee perceives pressure and recognizes an opportunity, the final piece of the puzzle is personal rationalization. Adhering to moral behavior is a more difficult feat for some. The potential fraudster may feel stealing assets is the only way to save the ones they love from losing everything. These people may truly believe they are simply “borrowing” from a company that has entrusted them with said assets, and have an intention of paying back their misdoings with financial or performance reciprocation. They may not realize any other options and fail to understand – or completely disregard – the consequences of their actions. Some may feel cheated by the company through a lack of a bonus or salary.

Although there are countless ways for fraudsters to rationalize their behavior, the result is the same. The fraud triangle provides a time-tested approach to understanding the roots of all fraud, and it affords any company the opportunity to acknowledge warning signs and design methods to deter fraudulent behavior.

Stay tuned for future posts related to red flags of fraud and deterrence and control techniques.