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Key Elements of Occupational Fraud. Fraud Triangle – motivation, opportunity, and rationalization.

November 3rd, 2009 | by kutenk |

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Fraud Triangle

Three key elements are present in every internal fraud: motivation, opportunity, and rationalization. These three elements have become known as the “fraud triangle.

Motivation
The motivation component of fraud or embezzlement is the pressure or “need” that a person feels. It could be a true financial need, such as the need to replace belongings after a house fire. Other real needs may include financial distress from a lost job, high medical bills, child support payments, investment losses, or heavy personal debt.
The motivation could also be a perceived financial need, whereby a person strongly desires material goods but doesn’t have the money or means to acquire them. A person may also have an addiction such as gambling or drugs, and that could be a motivator. Nonfmancial pressures and motivators may be in play as well, and these could include such things as the expectation for good results at work, the imposition of unachievable goals, or the need to cover up a poorly performed job. Any pressure in one’s business or personal life could conceivably motivate someone to commit occupational fraud.

Opportunity
The opportunity to commit fraud includes the access to assets, people, information, and computer systems that enables the person not only to commit the fraud but to conceal it. Employees are given all sorts of access to assets and records in order to carry out their job duties, and that access is one of the key components of fraud. This is why it is so important to limit employees’ access to only the assets, systems, and information that are necessary for them to properly perform their jobs.
As corporate structures have become more complex and managers have become responsible for a wider range of employees and functions, individual employees have been given more access and control. Increased access to resources and data, along with increased control over functional areas of companies, has created a situation in which it may be easier than ever to commit occupational fraud. Obviously, these increased opportunities to commit fraud involve risk, but in many ways they are unavoidable in the modern business world.

Rationalization
The third and final piece of the fraud triangle is rationalization. This is the process by which an employee determines that the fraudulent behavior is “okay” in her or his mind. For those with deficient moral codes, the process of rationalization is easy. For those with higher moral standards, it may not be quite so easy; they may have to convince themselves that a fraud is okay by creating “excuses” in their minds. A thief may convince himself that his theft just makes up for the bonus or raise that he should have received but did not. An embezzler may tell herself that she is just “borrowing” money from the company and that she will eventually pay it back. Maybe the rationalization is that no one will “miss” the funds or assets, or that the company “deserves” the theft because of lax supervision and security.
Management has the most control over the opportunity portion of the fraud triangle. It can limit access to assets and put controls in place that ensure monitoring of systems and people. Motivation can be constrained by management as well, although not to the degree that opportunity can be limited. The best way to reduce “needs” is by paying employees fairly (to reduce perceived financial burdens) and by creating performance systems that are reasonable (not requiring job performance beyond what is realistic).
Rationalization is probably the most dangerous piece of the fraud triangle because it is the one that companies have the least control over. It is nearly impossible for management to eliminate the rationalization piece because they can’t control the minds of employees. Management has no way of knowing what lies an employee may tell himself in order to justify fraud in his mind, so there is virtually no way of counteracting the lies.

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Tags: business fraud, fraud detection, Fraud Triangle

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