Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

The Fraud Triangle – 40 years later

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 40 years ago as an explanation of why someone would commit embezzlement are still relevant today in the context of many occupational frauds.


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.

Consider the single mom working as a bookkeeper who is having trouble making ends meet and feels she is unable to provide enough for her son.  An everyday occurrence for some but combined with opportunity and rationalization, a stepping stone to fraud for one particular bookkeeper.


Opportunity is the recognized ability to use their 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.

Let’s take that bookkeeper as an example.  She is responsible for all aspects of the accounting for a small business including paying bills, making deposits, calling in payroll, etc.  One week she finds herself short on cash and asks her boss for a payroll advance.  He willingly complies stipulating that it should be paid off with the next payroll.  The next week when she calls in the payroll she “forgets” to reduce her paycheck by the amount of the advance.  Her boss doesn’t review the payroll ledgers, the bank statements or the check registers. 


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.

Back to our bookkeeper, she was a long time employee who was in her mind grossly underpaid for all she put up with from her boss.  She needed the money, he would never notice, and by golly she deserved it.  So she continued to advance herself funds and still take her full payroll.  Fortunately for her boss, the outside accountants questioned some entries she was making to account for her advances.  But she had advanced herself four months of pay before getting caught.  Her boss was lucky it didn’t go on any longer than it did.

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 in positions of trust.

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