The Fraud Triangle
Honest, trustworthy employees begin to steal for a variety of reasons. They may be under personal financial pressure, and an opportunity to skim or pocket money may present itself. They may then rationalize their actions by first believing they’ll return the money; but when it the theft goes unnoticed, – they pocket more. They may justify their actions by dwelling on the missed raise or promotion they didn’t receive. Or perhaps convince themselves that you don’t really appreciate them or pay them enough anyway. The most common theory used to explain why a typically trustworthy employee begins to commit fraud is called the “Fraud Triangle”.
The premise behind it is simple: When those with the opportunity to commit fraud experience outside financial pressure they will rationalize or justify their behavior. Once the rationalization or pressure exceeds the fear of being caught, people commit fraud.
These three elements—opportunity, rationalization and financial pressure — coexist at different levels within each employee. Financial pressure may result from supporting a drug or gambling habit, paying for medical expenses or a child’s tuition costs. Not all thieving employees live beyond their means. They don’t buy lavish sports cars, sport designer clothes or book expensive vacations. Some may be just making ends meet and putting food on the table. Rationalization may come in the form of feeling underpaid and, unappreciated or from an innate sense of entitlement. Some justify their actions by doing nothing more than following the bad example displayed daily by the unethical actions of a manager or owner. If you, as the owner, cheat your customers or short your vendors, employees may feel little or no guilt cheating you (what goes around comes around). As discussed in a prior post, “Corporate Culture” is key.
The one element however that can be controlled by you is opportunity. No matter what pressures come against your employees or how strong their ability to rationalize or justify their actions, if the opportunity does not present itself, fraud can not occure.