11.4 Causes of frauds and fraud triangle

The causes of fraud can vary depending on the circumstances and individuals involved. However, there are common factors that contribute to the occurrence of fraud. One widely recognized model for understanding the causes of fraud is the Fraud Triangle, which was developed by criminologist Donald Cressey. The Fraud Triangle consists of three elements that, when present together, increase the likelihood of fraud. These elements are:

1. Opportunity: Opportunities for fraud arise when there are weaknesses or gaps in the internal control systems of an organization. These weaknesses can include inadequate segregation of duties, lack of oversight, poor supervision, or limited monitoring of financial transactions. When individuals perceive a gap in the control system, they may exploit it for personal gain.
2. Pressure (or Incentive): Pressure refers to the financial or personal circumstances that put individuals under stress or create a motivation for committing fraud. Common pressures include financial difficulties, personal debts, addiction, desire for material gain, or the need to maintain a certain lifestyle. When individuals face such pressures, they may see fraud as a solution to their problems.
3. Rationalization: Rationalization involves the process of justifying or morally accepting fraudulent behavior. Individuals who commit fraud often convince themselves that their actions are justified, given their circumstances or the perceived unfairness of the situation. They may convince themselves that they will pay the money back or that they deserve the ill-gotten gains.

When these three elements – opportunity, pressure, and rationalization – converge, they create a higher risk of fraud. Removing or minimizing any one of these elements can help reduce the likelihood of fraud.