Fraud Triangle

This past February I had the honor of speaking to a group of Private Investigators about Fraud, more specifically Embezzlement.  My presentation focused on "The Fraud Triangle", which is the creation of Donald R. Cressy.  This theory has served as the foundation of fraud investigation for years.  The theory of the Fraud Triangle is that a person will violate the trust of their employer if the three elements collide. 

The first element is the Pressure.  The Pressure is a problem or issue that the person is going through and they do not feel that they can share this problem with anyone else.  Since the issue is non sharable the person will try to find a way to solve the problem themselves.  These unsharable issues are usually debt from a failed investment or debt from a questionable activity. 


The second element is Opportunity.  The opportunity is what the employee or individual sees as a way to solve their unsharable problem.  So if the individual works in the accounting department they may see that there is a set of pre-signed checks for emergency use.  The opportunity the person sees is that no on keeps track of how many pre-signed checks there are and they are kept in an unlock draw.

The third element is Rationalization.  The theory states that when the employee or individual has the unsharable problem, sees the opportunity to solve their problem, they then progress to rationalization.  When the individual can rationalize the act of taking the money or committing the act of embezzlement, that is when the three elements collide.

Embezzlement is usually a short term answer to a problem that an employee is struggling with.  With the current state of the economy and the hardship created by the collapse of the housing market many people have found themselves falling on hard times.  The unemployment rate and foreclosure rate are evidence that individuals are struggling financially and may see their situation as desperate.  These economic conditions are a stimulating factor in the rate of embezzlement cases. 

As a business owner you need to aware of your financial position and look for professional help if you suspect deviant behavior in your accounting department.