Fraud Triangle (2024)

A framework used to explain the motivation behind an individual’s decision to commit fraud

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What is the Fraud Triangle?

The fraud triangle is a framework commonly used in auditing to explain the reason behind an individual’s decision to commit fraud. The fraud triangle outlines three components that contribute to increasing the risk of fraud: (1) opportunity, (2) incentive, and (3) rationalization.

Fraud Triangle (1)

Summary

  • The fraud triangle is a framework used to explain the reason behind an individual’s decision to commit fraud.
  • The fraud triangle consists of three components: (1) Opportunity, (2) Incentive, and (3) Rationalization.
  • Fraud refers to the deception that is intentional and caused by an employee or organization for personal gain.

What is Fraud?

The fraud triangle is used to explain the reason behind a fraud. However, what exactly is fraud?

Fraud refers to a deception that is intentional and caused by an employee or organization for personal gain. In other words, fraud is a deceitful activity used to gain an advantage or generate an illegal profit. Also, the illegal act benefits the perpetrator and harms other parties involved.

For example, an employee that pockets cash from the company’s register is committing fraud. The employee would benefit from getting additional cash at the expense of the company.

Below, we discuss the components of the fraud triangle.

The Fraud Triangle – Opportunity

Opportunity refers to circ*mstances that allow fraud to occur. In the fraud triangle, it is the only component that a company exercises complete control over. Examples that provide opportunities for committing fraud include:

1. Weak internal controls

Internal controls are processes and procedures implemented to ensure the integrity of accounting and financial information. Weak internal controls such as poor separation of duties, lack of supervision, and poor documentation of processes give rise to opportunities for fraud.

2. Poor tone at the top

Tone at the top refers to upper management and the board of directors’ commitment to being ethical, showing integrity, and being honest – a poor tone at the top results in a company that is more susceptible to fraud.

3. Inadequate accounting policies

Accounting policies refer to how items on the financial statements are recorded. Poor (inadequate) accounting policies may provide an opportunity for employees to manipulate numbers.

The Fraud Triangle – Incentive

Incentive, alternatively called pressure, refers to an employee’s mindset towards committing fraud. Examples of things that provide incentives for committing fraud include:

1. Bonuses based on a financial metric

Common financial metrics used to assess the performance of an employee are revenues and net income. Bonuses that are based on a financial metric create pressure for employees to meet targets, which, in turn, may cause them to commit fraud to achieve the objective.

2. Investor and analyst expectations

The need to meet or exceed investor and analyst expectations to ensure stock prices are maintained or increased can create pressure to commit fraud.

3. Personal incentives

Personal incentives may include wanting to earn more money, the need to pay personal bills, a gambling addiction, etc.

The Fraud Triangle – Rationalization

Rationalization refers to an individual’s justification for committing fraud. Examples of common rationalizations that fraud committers use include:

1. “They treated me wrong”

An individual may be spiteful towards their manager or employer and believe that committing fraud is a way of getting payback.

2. “Upper management is doing it as well”

A poor tone at the top may cause an individual to follow in the footsteps of those higher in the corporate hierarchy.

3. “There is no other solution”

An individual may believe that they might lose everything (for example, losing a job) unless they commit fraud.

Related Readings

Thank you for reading CFI’s guide to Fraud Triangle. To keep learning and developing your knowledge base, please explore the additional relevant CFI resources below:

Fraud Triangle (2024)

FAQs

How do you break the fraud triangle? ›

Break the fraud triangle by removing one of the three elements: motivation, rationalization or opportunity. The business owner is most in control of the opportunity element.

What are the fraud triangle keywords? ›

The concept states that there are three components which, together, lead to fraudulent behavior. They are (1) a perceived un-shareable financial need (motive/pressure), (2) a perceived opportunity to commit fraud, and (3) the rationalization of committing the fraud.

What three factors does the fraud triangle show? ›

The fraud triangle is a framework commonly used in auditing to explain the reason behind an individual's decision to commit fraud. The fraud triangle outlines three components that contribute to increasing the risk of fraud: (1) opportunity, (2) incentive, and (3) rationalization.

What is the most important part of the fraud triangle? ›

-Rationalization. The most important element of the fraud triangle. For an employee to commit fraud, the workplace environment must provide opportunities that an employee can exploit. These occur when the workplace lacks sufficient controls to deter and detect fraud.

What is the fraud triangle in simple terms? ›

According to Albrecht, the fraud triangle states that “individuals are motivated to commit fraud when three elements come together: (1) some kind of perceived pressure, (2) some perceived opportunity, and (3) some way to rationalize the fraud as not being inconsistent with one's values.”

Which element of the fraud triangle should be removed? ›

Breaking the Fraud Triangle

"Of the three elements, removal of Opportunity is most directly affected by the system of internal controls and generally provides the most actionable route to deterrence of fraud" (Cendrowski, Martin, Petro, The Handbook of Fraud Deterrence).

Do all three factors of the fraud triangle have to be present? ›

Essentially, the three elements of the Fraud Triangle are: Opportunity, Pressure (also known as incentive or motivation) and Rationalization (sometimes called justification or attitude). For fraud to occur, all three elements must be present.

What is the 4th element of the fraud triangle? ›

In addition to addressing incentive, opportunity, and rationalization, the authors' four-sided “fraud diamond” also considers an individual's capability: personal traits and abilities that play a major role in whether fraud may actually occur even with the presence of the other three elements.

What is an example of opportunity in the fraud triangle? ›

At this point, a person identifies ways to commit fraud with the lowest amount of risk. Here are a few examples of fraud opportunities: Lying about the number of hours worked, their sales numbers, or their productivity to receive higher pay.

Which of the following is not one of the 3 components of the fraud triangle? ›

Answer and Explanation:

They are opportunity, incentive, and rationalization. However, risk can deter individuals from committing fraud. As such, it is not part of the fraud triangle.

How are most frauds identified? ›

Rules-based systems: One of the most traditional fraud detection and fraud prevention methods is the use of rules-based systems. These systems employ predefined rules to identify potential instances of fraud based on certain patterns or conditions.

What are 3 factors that push a person to commit fraud according to the fraud triangle? ›

Developed by American Sociologist Dr. Donald Cressey, the theory centers around the three key factors present when an ordinary person commits fraud: rationalization, opportunity, and motivation or pressure. Importantly, in most cases, all three factors must be present for fraud to occur.

Which of the following statements is correct with respect to the fraud triangle? ›

Which of the following statements is correct with respect to the elements of the “fraud triangle”? Fraud is most common when motive and lack of integrity exist together.

What is misappropriation of assets? ›

Asset misappropriation fraud happens when people who are entrusted to manage the assets of an organisation steal from it. Asset misappropriation fraud involves third parties or employees in an organisation who abuse their position to steal from it through fraudulent activity. It can also be known as insider fraud.

What is the difference between the fraud triangle and the integrity triangle? ›

While the Fraud Triangle explains what motivates fraudsters, the Integrity triangle emphasizes the values that encourage people to do what is right for the organization.

What is the CIA fraud triangle? ›

The triangle states that individuals are motivated to commit fraud when three elements come together: 1) some kind of perceived pressure 2) some perceived opportunity and 3) some way to rationalize the fraud as not being inconsistent with one's values.

What is the greed in the fraud triangle? ›

Greed is at the top of the Executive Fraud Triangle. (See the graphic below.) The executive wants for more and so will use his position and related authority to get it.

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