The Fraud Triangle
Have you ever heard of the “80/10/10” saying? It suggests that 10 percent of the population is honest; they will not lie, steal or cheat under any circumstances. Another 10 percent of the population is dishonest and will participate in criminal activities whenever they can. The remaining 80 percent, given sufficient pressures and the right opportunity may behave unethically. This is the first in a series of newsletters dealing with fraud, internal control and fraud awareness, and proper use of system internal controls, especially workflow. This newsletter deals with why someone steals. Fraud encompasses a variety of irregularities and illegal acts characterized by intentional deception. There are various types of fraud including theft of assets, time, money, and supplies; fraudulent financial reporting; and misappropriation of assets. To better assess risk, and prevent and detect fraud, it is important to understand what motivates people to commit fraud. The FRAUD TRIANGLE illustrates the three basic elements that allow fraud to occur.

April 2011
The second element of the fraud triangle is PRESSURE. Desperate people do desperate things. Pressure comes in many forms, both financial and non-financial. Individuals may have personal financial issues such as high medical bills or past-due mortgages. Others gamble or have addictions that may compel them to commit fraud. For some, it is simply the desire for a lifestyle they couldn’t afford otherwise. Lastly, unrealistic goals and deadlines can also provide incentives for employees to commit financial reporting fraud. The final fraud triangle element is RATIONALIZATION. Rationalization occurs when an employee justifies why they commit fraud. For example, a person who faces losing their home might say “I deserve to have a nice home.” Employees who have not received pay increases might say “I’m just making