Fraud triangle definition
/What is the Fraud Triangle?
The fraud triangle is a model showing the conditions that increase the likelihood of fraud being committed. Fraud is any intentional deception engaged in for personal gain. The three components of the fraud triangle are perceived pressure, opportunity, and rationalization. They are explained further below.
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Perceived Pressure
A person may be liable for significant liabilities, such as the cost of supporting sick relatives, college loans, car loans, and so forth. Or, they may have an expensive habit that requires ongoing funding. When the individual sees no way out of the situation, they may resort to fraud. However, there may only be a perceived level of pressure, such as earning comparatively less than one’s friends. This latter situation can trigger expectations for a better lifestyle, perhaps involving a sports car, foreign travel, or a larger house. When a person does not see a clear path to meeting these expectations by honest means, he or she may resort to dishonest alternatives.
Opportunity
When the preceding pressures are present, a person must also see an opportunity to commit fraud. For example, a maintenance worker may realize that there are no controls over checking out and returning tools; this is an opportunity for theft. Generally, the opportunity for fraud increases when a business has poor internal controls.
Rationalization
An additional issue that is needed for fraud to continue over a period of time is the ability of the perpetrator to rationalize the situation as being acceptable. For example, a person stealing from a company’s petty cash box might rationalize it as merely borrowing, with the intent of paying back the funds at a later date. As another example, a management team adjusts reported earnings for a few months during mid-year, in the expectation that sales will rise towards the end of the year, allowing them to eliminate the adjustments by year-end.
The likelihood of fraud being committed increases when more of these conditions are present.