Learning from case studies: The Fraud Triangle and what it means to your business

From Paul Fiorelli’s 2024 book “Establishing Workplace Integrity: Six Lessons in Values-Based Leadership”

This case study is part of the chapter about “Why Good People Do Bad Things” and discusses the classic motivation for misconduct – the fraud triangle.

Case Study – The Fraud Triangle

A trusted employee, who hasn’t taken a vacation in years, wakes up in a hospital bed to the sounds of beeping monitors. The last thing they remember was driving home from work and seeing a deer jump out of the bushes. They heard a loud thump, then everything went dark. They’re still in a foggy haze, but questions come racing across their mind:

• Who found me?
• What am I doing here?
• Where am I?
• When can I get back to work?
• Why did this happen to me?

Another co-worker temporarily assumes the hospitalized employee’s duties. The stand-in is first confused, then concerned about how the injured co-worker has been recording certain transactions. The numbers just aren’t adding up. Digging deeper, the reluctant replacement unravels an embezzlement scheme that’s been covered up for years. The company is the latest victim of “the Fraud Triangle,” a phrase attributed to criminologist Donald Cressey.  Other researchers have stretched, pulled, and reshaped this polygon into a Fraud Diamond and even a Fraud Pentagon, but the basic elements remain the same – motivation, opportunity, and rationalization.

Motivation means the fraudster believes they need more money. They’re typically under a lot of financial pressure. Perhaps a spouse lost a job, or a relative is ill. Maybe they have an addiction to gambling, alcohol or drugs, or just like living beyond their means. They have a problem but can’t share it with anyone else. So, what’s the solution?  This is when opportunity knocks, sometimes in the form of inadequate internal controls. Fraudsters understand the weaknesses of their company’s checks and balances. They may have even designed them. An example would be allowing the same person to send out invoices and then open the payment envelopes. The customer paid what they believed was a legitimate bill, but the money was diverted to the employee’s personal account – never actually hitting the company’s books.  This is a recipe for disaster because no one was looking over their shoulder. Check – no! Balance – no! Whenever possible, values-based leaders need to segregate duties within the office. They should consider rotating responsibilities and conducting random spot audits. And just because an employee refuses to take any time off, doesn’t mean they’re loyal and dedicated. They might not want anyone else reviewing their activity, so they can prolong the fraud. Countless schemes have been revealed after employees were forced to take a vacation or ended up in the hospital because of an accident. Requiring that every employee spend at least some time away from their job is another control that could have worked in this case.   

Rationalization occurs when people rattle off a list of reasons, at least to themselves, why they’re acting a certain way. They may feel underappreciated, trapped, or even a “team player.” Whatever shape and size of the fraud, it can be very expensive to companies. According to the Association of Certified Fraud Examiners (ACFE), fraud cost companies around 5% of their revenue each year and typically lasts 12 months before being detected.[1]

HOW TO RESPOND TO FRAUD

What do we typically say when we find out about potential problems? 

Another variation of the 5 “Ws” come to mind:

• “Who did this?”
• “What were you thinking?
• “Where will this problem lead us?”
• “When will it stop?”
• “Why didn’t I find out about this sooner?”

These questions are understandable, but they’re the wrong ones being asked at the wrong time.  A better line of inquiry would be:

• “Who’s in trouble?”
• “What can I do to help?”
• “Where do you need me?”
• “When will employees believe they can succeed, while staying within acceptable rules?”
• “Why didn’t you trust me?”

Paul’s book, “Establishing Workplace Integrity: Six Lessons in Values-Based Leadership”, is available on Amazon.

[1] Occupational Fraud 2024: A Report to the Nations by the Association of Certified Fraud Examiners.