Fraud Detection

Pressure (or Motive) | Opportunity | Rationalization | These are the three sides to the fraud triangle.


Pressure (or Motive) represents an incentive to commit fraud which is defined as a non-shareable financial problem. These are obligations that a person feels they cannot share with others or resolve through legitimate means without social or professional ruin. According to a criminologist named Donald Cressey, these problems can be categoriezed into six types, including status gaining (living beyond one’s means), business reversals (uncontrollable failures), and employer-employee relations where the individual feels unfairly treated.

• Difficulty in paying back debts: Managing standard financial obligations that have become unmanageable.

• Problems resulting from personal failure: Financial crises stemming from one's own errors or shortcomings.

• Business reversals: Uncontrollable failures in business, often brought on by external forces like inflation or recession.


• Physical isolation: A state where the individual is isolated from people who can help, leaving them to solve their problems in secret.

• Status gaining: The classic habit of living beyond one’s means to maintain a certain social standing.

• Employer-employee relations: Problems arising from an employer’s unfair treatment, which may lead the employee to believe they are reclaiming what is rightfully theirs.

Opportunity is the "fuel" that allows the spread from the motive. When a person exploits a position of trust with a low risk of being caught. This typically stems from the ability to override existing controls of a vunerable target.

Rationalization
Because most fraudsters are first-time offenders who view themselves as honest, ordinary people, they must justify the act to themselves to maintain their integrity. They apply "verbalizations" to their conduct, such as convinced themselves they are merely "borrowing" the money, that the act is for the "good of the company," or that they are simply reclaiming what they are "owed" due to unfair treatment.

While auditors can often observe the Opportunity side of the triangle through system audits, Pressure and Rationalization are internal cognitive states that are notoriously difficult to detect until the "fraud" is already well underway.