Who Created the Fraud Triangle & Its 3 Elements

The Fraud Triangle is a widely recognized conceptual framework in accounting, auditing, and fraud examination. It provides a model for understanding the conditions under which occupational fraud is likely to occur. This framework helps professionals analyze why individuals might commit fraud and identifies factors that contribute to such behavior. It serves as a foundational tool for assessing fraud risks and developing strategies to prevent and detect fraudulent activities within organizations.

The Originators

The foundational research leading to the Fraud Triangle is primarily attributed to Donald R. Cressey. In the 1950s, Cressey conducted extensive studies on embezzlers, interviewing convicted individuals to understand the circumstances that led them to violate trust. His work revealed that trusted persons became “trust violators” when three specific conditions converged.

Cressey’s findings were detailed in his 1953 work, “Other People’s Money.” This book explored the psychological and social factors underlying embezzlement, outlining his hypothesis on the conditions necessary for such crimes. While Cressey laid the groundwork, the term “Fraud Triangle” was later coined and popularized by W. Steve Albrecht and his colleagues. Their work refined and widely disseminated Cressey’s core concepts, though Cressey remains the acknowledged originator of the underlying theory.

The Three Elements

The Fraud Triangle consists of three interconnected elements: Pressure, Opportunity, and Rationalization. All three elements are typically present when fraud occurs.

Pressure refers to a perceived non-shareable financial need or problem. This could stem from overwhelming personal debt, gambling addiction, or a desire to maintain a lavish lifestyle. Unrealistic performance targets or compensation structures within an organization can also create pressure to manipulate financial results.

Opportunity is the perceived chance to commit fraud without being detected. This is often created by weaknesses in internal controls, such as a lack of segregation of duties, inadequate oversight, or poor documentation. A position of trust can also provide the means to exploit these deficiencies.

Rationalization involves the process by which a fraudster justifies their actions, convincing themselves their behavior is acceptable. Common rationalizations include believing they are “borrowing” money, feeling entitled, or perceiving the organization will not miss stolen assets. This self-deception allows individuals to reconcile fraudulent acts with their personal ethical values.

How the Triangle is Applied

Professionals utilize the Fraud Triangle as an analytical tool across various disciplines, including auditing, forensic accounting, and risk management. It helps explain why individuals commit fraud by identifying contributing factors. Understanding the interplay of pressure, opportunity, and rationalization helps organizations gain deeper insights into the human element of fraud.

The framework is applied in fraud risk assessment processes. Organizations evaluate the presence of these three elements to identify vulnerabilities and assess the likelihood of fraud. For example, an assessment might look for employees facing financial distress (pressure), departments with weak internal controls (opportunity), and a workplace culture that might foster rationalization.

Understanding the Fraud Triangle guides the development of fraud prevention and detection strategies. Addressing opportunity involves strengthening internal controls, such as stricter approval processes, enhanced monitoring, and proper segregation of duties. To mitigate pressure, companies might consider employee support programs or balanced performance incentives. Fostering a strong ethical culture and clear communication about consequences can challenge potential rationalizations.