Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

The Fraud Triangle, still as relevant as ever

Several years ago, I wrote about the Fraud Triangle. A recent case I read about shows once again how relevant it is.

In 1973, Donald Cressey published the results of his research on embezzlement in Other People’s Money: A Study in the Social Psychology of Embezzlement. Mr. Cressey’s hypothesis has become known to many as the “fraud triangle.” The factors identified more than 40 years ago as an explanation of why someone would commit embezzlement are still relevant today in the context of many occupational frauds.

Fraud Triangle, fraudPressure

Pressure is felt by an individual either from within or from external sources. Pressure that is self-imposed may be the need to “keep up with the Joneses.” Or, it may be the perceived pressure of meeting family expectations.

External pressure may be financial obligations that cannot be met for numerous reasons. They could include medical bills, gambling or substance issues or living beyond ones means. Often, the individual feels the pressure of the financial burden cannot be resolved through legitimate means.

A recent case involves an employee of Amazon. The fraud was discovered by loss prevention officers who saw the employee on camera removing small electronics from the warehouse. When questioned, the employee admitted to having financial hardships and a substance abuse problem. He began taking items to help deal with those issues. A clear case of pressure on this individual.

Has your client had a fraud prevention check-up?

Opportunity

Opportunity is the recognized ability to use one’s position to solve the financial burden with low risk of being caught. If an employee recognizes an opportunity to help themselves to the cookie jar with little risk of getting caught, they may consider this as a solution to their financial burden.

The employee was apparently just walking out of the warehouse with the small electronics on his person or in his bag. He would take items off the shelf for an order and grab another one. He likely saw the opportunity each day as he left work with no one checking his bag for items. It is unclear what systems Amazon had in place, but clearly nobody was really paying attention and the employee took advantage of that for eight months.

Rationalization

An employee does not want to be considered a thief, so they will find a way to rationalize their actions. Often, they start out taking a “loan” which is then not paid back. Or, they justify their actions as having deserved it for all the time they have devoted to the business. An employee who is under financial pressure with an opportunity available to them, who can rationalize their actions, is a ticking time bomb when it comes to fraud.

fraud, Fraud TriangleThe employee, when caught, told investigators that he worked a limited number of hours because he was not allowed to increase his hours because then he would qualify for increased benefits. He also noted that there were limited shifts available to employees in his position. He admitted that while he began stealing to meet his financial needs, he really increased his efforts when he realized that Jeff Bezos, the CEO of Amazon, was the richest person in the world while he was struggling to make ends meet. This was his rationalization to continue and even increase his merchandise thefts.

Employers should keep the Fraud Triangle in mind when considering the risk of fraud in their organization. Be aware of Pressure, Opportunity and Rationalization when it comes to your employees.

Melissa Loughlin-Sines, CPA, CFE, CVA, CFF, ABV

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