In 1980, my colleagues and I published a fraud model that was designed to explain why people commit fraud. We surveyed dozens of fraud cases and tried to identify the relevant reasons that were used to explain why the fraud occurred. We categorized these reasons into three major factors: 1) situational pressures that cause people to need additional money; 2) convenient opportunities that entice people to take money that does not belong to them; and 3) low moral character that results from a lack of clear standards of honesty.
Various manifestations of these three factors could be easily identified in most of the cases we reviewed even though each fraud was unique. We suggested that this model was an additive model that could be represented best as a balance scale with three scales representing each of the three factors. Fraud would be more likely to occur when there were intense (versus low) situational pressures, convenient (versus low) opportunities, and low (versus high) moral character. As an additive model, we predicted that fraud would occur if the balance of power was weighted in favor of fraud due to any combination of these three factors. All three would not be necessary for a fraud to occur.
Since 1980, the fraud model has been slightly altered by the accounting profession and is called the Fraud Triangle. Auditors have relied on this model extensively to help them identify high-risk situations that call for more careful audits. The alteration they made to the model concerns the third factor: moral character is replaced with rationalizations. In many ways this is a useful change since dishonest behavior typically results in a rationalization process that produces visible observations, such as making excuses for lost receipts and dismissing accounting irregularities.
The fraud triangle is a multiplicative model that assumes all three factors must be present for a fraud to occur. Fire is used as a common metaphor to explain the fraud triangle. A fire requires fuel, oxygen, and heat before a fire will start. Likewise, the fraud triangle assumes that fraud requires situational pressures, convenient opportunities, and rationalizations before the fraud will occur.
The problem with the Fraud Triangle is that rationalizations typically occur after the fraud. Most of the dishonest acts people commit are not planned and intentional decisions. A person may be caught in a situation where he or she wants a particular outcome and the easiest way to get it is to do something dishonest. I have interviewed dozens of people who were incarcerated or on probation and asked them to describe their first mistake. Very few said they actually planned to do wrong. They typically explain how they were in a difficult situation and simply chose the most convenient solution.
People who have low moral character are more likely to behave dishonestly because they have not acquired high standards of honesty to which they are internally committed; they consciously plan to lie, cheat, and steal. Unfortunately, some people have low moral character and look for ways to behave dishonestly. But others who are reasonably committed to honesty and think of themselves as basically honest individuals may find themselves in difficult situations that entice them to behave expediently. This usually results in a rationalization process because of the dissonance between one’s behavior and one’s values.
There are two proverbs or rules of conduct that seem to explain this process: 1) anything you do wrong once is easier to do wrong the second time, and 2) whenever there is a conflict between your values and your behavior, behavior always wins. To illustrate: the first time you decide to walk out of a store without paying for an item, you will probably feel very guilty. But if you continue to do it, your guilt will be replaced with various justifications, such as “Everyone does it.” “It’s not really that bad.” “The stores make too much profit.” “This is just a game I play with the stores.”
Although the fraud triangle may help auditors detect fraud, it fails to adequately explain why good people sometimes make serious mistakes that they never thought they would commit. People don’t have to create reasonable rationalizations before they commit a fraud; the excuses come later. For example, when people have a non-sharable need and feel too embarrassed to share their problems with any other person, they may act expediently and simply use unauthorized funds to solve an immediate need. They didn’t actually plan to steal the money; but theft was the easiest way to solve the problem. Once they have acted dishonestly, they begin to create various justifications and excuses, especially if they continue to behave dishonestly.
According to the fraud model, even basically honest people can make serious mistakes and behave dishonestly even though they never planned to do so. No one should ever be so smug as to think that they would never behave dishonestly because they are “too honest” to do so. People who leave themselves in situations where there are intense situational pressures and convenient opportunities will eventually commit a fraud regardless of how honest they think they are. The secret is to never leave yourself in such situations; avoid them.
• Never have a non-sharable need; always have at least one other person in whom you can confide and who will tell you if something sounds foolish or wrong.
• Always balance your accounts and know how much money you have.
• Never co-mingle your money with funds that belong to another person or organization.
• Don’t be embarrassed to admit that you can’t afford a purchase.
• Be cautious about throwing good money after bad investments; have an exit plan and know when to leave.
• Never be the only person who handles the money of another person or organization; always have someone who will audit your records and hold you accountable.
• Avoid situations where many people know the combinations and passwords to secure places, such as safes and locked boxes.
• Always have two people present to receive monetary donations and make bank deposits. $