Fraud triangle

What it means

The fraud triangle is a model formulated in the mid-20th century by criminologist Donald Cressey while researching embezzlement. According to it, a previously honest person commits fraud when three factors come together: pressure, opportunity and rationalisation. The model is now one of the foundations of auditing and fraud prevention.

Pressure is a financial or personal problem the person will not or cannot address openly, such as debts, addiction, unrealistic targets or fear of losing their job. Opportunity is weak control that allows the fraud to be committed and concealed. Rationalisation is the inner justification: I am only borrowing it, the company owes me, everyone does it.

A company influences the three corners differently. It affects employees' personal pressures only partly, for example through realistic targets and fair pay. Culture and an ethics code weaken rationalisation. But opportunity is what it can influence most directly, through internal control.

How it works in practice

The most effective tool against opportunity is segregation of duties, so no single person controls a whole process from order to payment. Add regular stocktakes, bank reconciliation by an independent person, checks on changes to supplier master data and mandatory leave for key positions, during which someone else does the work.

Fraud is often uncovered by colleagues rather than controls. A working whistleblowing system that protects the reporter and ensures reports are investigated is therefore important. Larger companies must have one under the whistleblower protection act; for smaller ones it is good practice.

When investigating a suspicion, the model helps understand the context and look for warning signs: an employee who never takes leave, refuses to delegate, lives beyond their means or resists checks. Such signs are not proof but a reason for a deeper review, for example by internal audit.

What to watch out for

The most common mistake is trust as a substitute for control. Small companies often skip checks because people trust each other. Yet that is exactly where long-running frauds occur, because opportunity is large and nobody checks anything. Controls are not an expression of distrust but protection for everyone.

Watch out for pressure created by the company itself. Unrealistic sales targets or bonuses tied only to short-term results can push managers to manipulate figures. Such financial reporting fraud may not put money directly into the employee's pocket but can seriously harm the company.