The fraud triangle is a concept explaining the drivers behind fraud. It consists of the following elements: opportunity, motivation, and rationalisation.
Let’s use a simple example to put these into context.
Imagine that you own a very successful coffee shop located on a University campus. However, since the business has grown dramatically in the last year, you realise you need additional help and hire a person in their mid-30s who have completed a barista course.
Every day at 14:30, you need to leave the shop to pick up your kids from school (those of you who have kids know that this is a non-negotiable deadline). After you go, the shop closes in 2 hours. At that time, the person working for you will count the cash in the till, take it to the local bank branch, deposit it into your account and give you the deposit slip the next day. This is where opportunity comes in.
How do you know that the total cash in the till has been deposited in the bank? You don’t!
One way to prevent that is to have someone other than your employee count the cash, write the amount on a piece of paper that will be handed to you and then leave it up to your employee to deposit the money and give you the deposit slip. This is called segregation of duties (and it’s a topic worth its article).
Let’s now move on to motivation. When you hired your new barista, they told you that their spouse is working as a National Logistics Manager for a large multinational. They earn $97,000 p.a. You pay your employee $35 per hour because they are exceptional in making coffee and serving customers (I know, this may seem a lot, but remember, your employee is great). Simple math tells us, according to OECD, that in Australia, for example, the average number of hours worked per year is 1,664, resulting in $58,240 annual income. Consequently, your employee’s spouse brings in approximately 2/3 of the family income.
The following assumption is that the current year is 2021, and because of COVID-19, the spouse of your barista has been laid off. So, suddenly the family income has dropped by 66% (see above). And, here comes the catch. Their income has dropped by 66%; however, their expenses, e.g. mortgage, utilities, etc., haven’t. They may have dropped by 30%, let’s say they are now skipping vacations, eating out, etc., but the bills are still the same. So, the motivation is the fall of 36% in annual income (66% drop — 30% reduction in expenses).
Under these circumstances, your barista will be more tempted to “dip into” the cash than the situation when their spouse is still earning the same amount. However, please keep in mind this is just one simplified example. Motivation may come from many different angles, “keeping up with the Joneses”, etc.
And finally, let’s have a look at rationalisation. Your employee’s kids are in a private school. So, the thought process may be, “I’ll only do it once so that we can pay the school fees for this term”. They are not doing for themselves, and they are not splashing on luxuries; it’s only a once-off thing, etc. Research shows that this type of behaviour gets more entrenched as it continues, making it easier to justify.
But wait, this is just an illustrative, theoretical example, right?!
Well, not really! If we move out of the realm of hypothetical and into the hard numbers, there are some very worrying stats we can discover. According to the Association of Certified Fraud Examiners (ACFE), the occurrences of fraud are much more common than most people assume. “Report to the Nations on Occupational Fraud and Abuse”, published by ACFE, states that a typical organisation loses 5% of its annual revenue from fraud. The median loss is $150,000, and the median duration is 18 months.
While these stats are disturbing, it is possible to significantly reduce incidents of fraud through simple measures, such as awareness education and segregation of duties.