Foundation of all Frauds: The Fraud Triangle
Hello Investigators!
Welcome to our very first post on this website, where your journey as a Forensic Accounting Investigator officially begins!
Lets first consider the scenario below:
John, being the financial controller of a company, approves the cheques for payments at any point in time. He knows that the boss trusts him, and would not check on the payments he approves. Recently, due to Covid-19, his family’s savings have been depleting and they are struggling financially. Before John approves a payment made to his own bank account, he tells himself, “The company earns so much, I should deserve a share of it as well!”
At first glance, the above scenario of John transferring the company’s money to his own account would seem like any ordinary fraud case. However, as investigators, we try to understand the motives and thoughts behind these fraudsters. In fact, there are actually many applicable forensic concepts and psychology to this scenario!
With that in mind, let’s start off with the basics of the basics → The Fraud Triangle.
Most, if not all frauds happen because of the presence of the 3 elements within this triangle: (1) Incentive, (2) Rationalisation and (3) Opportunity.
Element 1: Incentive
The very first element is Incentive, which also translates to pressure / motivation in the perspective of the perpetrator. This can be done through threatening / blackmailing, or even a situational basis. For instance, a family member of the perpetrator might require a huge amount of funds for medical treatment. This creates a motivation for the perpetrator.
Element 2: Opportunity
The next element is Opportunity, which is the presence of an object, or something that the perpetrator can defraud or get their hands on. Opportunity usually presents itself due to the victim’s negligence, or lack of effort. A simple example would be leaving your wallet unattended on the table while you place an order at the hawker centre. This act of not attending to your wallet creates the opportunity for the perpetrator to get his hand on your wallet!
Element 3: Rationalisation
The final element is Rationalisation, which is the hardest element to identify as it is not observable as compared to the other 2 elements. Rationalisation happens within the heart and mind of the perpetrator, where they continuously convince themselves that the act that they are about to commit is right and justifiable. This includes thoughts like “Everyone is doing it as well, so why not?” - a perfect example of someone rationalising that even if the act is wrong, if the majority is committing it, then it will eventually be fine.
Now, consider the introductory scenario again, but this time, let’s apply the various elements of the fraud triangle!
John, being the financial controller of a company, approves the cheques for payments at any point in time. He knows that the boss trusts him, and would not check on the payments he approves (Opportunity). Recently, due to Covid-19, his family’s savings have been depleting and they are struggling financially (Incentive). Before John approves a payment made to his own bank account, he tells himself, “The company earns so much, I should deserve a share of it as well!” (Rationalisation).
Now that you have a basic understanding of what the fraud triangle is, do look out for our next post where we will share about the different types of fraud!
