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

November 3, 2009 by kutenk
Filed under: Fraud 

5174-fullsize

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.

Related posts:

  1. 5 Legal Elements of Fraud. How Fraud investigators look for evidence of intent to defraud.
  2. Fraud Risk Assessment: Building a Fraud Audit Program | by Leonard W. Vona | ISBN: 9780470129456. Fraud Management Books. Payroll Fraud Schemes. Fraud Risk Control Strategy. Sample Fraud Audit Report. Travel Expense Concealment Strategies. Fraud in Expenditure. Contract Fraud Audit Plan
  3. Employment Law: The Workplace Rights of Employees and Employers, 2nd Edition | by Benjamin W. Wolkinson | ISBN: 9781405134088. Occupational Safety and Health. Equal Employment Opportunity Law. The Law of Unjust Discharge. Employment of the Handicapped. Workers’ Compensation Guide
  4. Corporate Resiliency: Managing the Growing Risk of Fraud and Corruption | by Toby J. Bishop and Frank E. Hydoski | 2009 | ISBN: 9780470405178. Principles of Fraud Risk Management. Fraud and Corruption Avoidance Strategies and Tactics. Anti-Fraud Controls.
  5. Common Types of Operational Risk. Internal fraud.External fraud.Legal and liability losses.Noncompliance with regulations.System failures.Inappropriate business practice.
  6. Intrinsic Motivation at Work: What Really Drives Employee Engagement | by Kenneth W. Thomas | 2009 | ISBN: 9781576755679. Motivation Books. Worker Development. Four Intrinsic Rewards.
  7. Opportunity for Teaching English Overseas with LC Coaching (lccoaching.com)
  8. How to Motivate Your People. Boost Performance through Motivation. Motivational Management Style.
  9. 7 Stages of Working Life. Career Planning and Occupational Awareness Tips for Career Success.
  10. Managing Employee Performance and Reward: Concepts, Practices, Strategies | by John Shields | ISBN: 9780521820462. Competency-Based Human Resource Management. Motivation Management. Performance Review and Development. Job-Based, Skill-Based and Competency-Based Pay Systems. Executive Incentives.
  11. Safety Answer Book | by J.J. Keller & Associates, Inc. | 2009 | ISBN: 9781877798467. Health and Safety Books. Safety Engineering Books. Occupational Safety and Health Administration (OSHA). Electrical Design Safety Standards. Environmental Management Systems
  12. S.K.I.R.T.S in the Boardroom: A Woman’s Survival Guide to Success in Business & Life | by Marshawn Evans | ISBN: 9780470383339. Business Success Books. Life Success EBooks. Motivation and Empowerment Guide. The Female Factor.
  13. Key Elements that form the core of leadership.

Tags: , , , , , , ,

Comments

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

  1. Disney Pixar Cars: Boom Comics Recap Checklist & Sdcc Cars Panel … « The Buzz on Tue, 3rd Nov 2009 1:43 am

    2. [...] Key Elements of Occupational Fraud. Fraud Triangle – motivation … [...]

  2. cobusiness.org » Key Elements of Occupational Fraud. Fraud Triangle – motivation … on Tue, 3rd Nov 2009 11:42 pm

    3. [...] Professional Development, Personal Learning from KuTenk Success … Here is the original: Key Elements of Occupational Fraud. Fraud Triangle – motivation … var $j = jQuery.noConflict(); $j(function() { $j("#get-article-code").css({opacity: 0}).hide(); [...]

Tell me what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!

You must be logged in to post a comment.