Match Each Situation With The Fraud Triangle Factor

Match Each Situation With The Fraud Triangle Factor

Brief Exercise 8-1 Match each situation with the fraud triangle factor—opportunity, financial pressure, or rationalization—that best describes it.

1. An employee’s monthly credit card payments are nearly 75% of his or her monthly earnings.

2. An employee earns minimum wage at a firm that has reported record earnings for each of the last five years.

3. An employee has an expensive gambling habit.

4. An employee has check-writing and -signing responsibilities for a small company, as well as reconciling the bank account.

Sample Paper For Above instruction

The fraud triangle, a concept developed by criminologist Donald Cressey, explains the three key factors that must be present for an individual to commit occupational fraud: opportunity, financial pressure, and rationalization. Understanding these elements is essential for organizations aiming to detect, prevent, and manage fraud risks effectively. This paper will analyze various workplace scenarios and classify each according to the corresponding fraud triangle factor, thereby illustrating how these elements manifest in real-world situations.

Scenario 1: An employee’s monthly credit card payments are nearly 75% of his or her monthly earnings

This scenario exemplifies financial pressure, a core component of the fraud triangle. The employee's significant credit card payments imply a substantial financial burden, possibly related to personal debts or lifestyle expenses that exceed their income. Such intense financial pressure can motivate dishonest behavior, especially if the individual perceives no immediate alternative to meet their obligations. According to the Association of Certified Fraud Examiners (ACFE), financial stress, including high personal debt and insufficient income, frequently acts as a catalyst for fraudulent activities (ACFE, 2020). Therefore, this situation aligns most closely with the element of financial pressure, which propels individuals toward misconduct as a means of alleviating monetary hardships.

Scenario 2: An employee earns minimum wage at a firm that has reported record earnings for each of the last five years

This situation primarily involves opportunity, another critical facet of the fraud triangle. Despite the company's robust financial performance, the employee's low wages may foster a sense of entitlement or resentment, potentially leading to fraudulent acts if they perceive a chance to exploit weaknesses in internal controls. Opportunity arises when an individual perceives that controls are weak or ineffective, allowing them to commit fraud without immediate detection. Firms with high earnings might inadvertently create opportunities if they lack rigorous oversight or internal checks. Research indicates that employees with access to assets or financial systems, combined with perceived opportunities, are more likely to engage in fraud (Josephson & Runkel, 2021). Consequently, this scenario highlights the role of opportunity created by the disparity between company profitability and employee compensation.

Scenario 3: An employee has an expensive gambling habit

This example clearly reflects the element of rationalization. The employee's gambling addiction imposes a personal financial strain, and rationalization often involves justifying fraudulent acts as deserved or necessary to satisfy personal needs or debts. According to Cressey, individuals engaged in fraud often rationalize their behavior by minimizing guilt or justifying actions through sentiments such as: “I work hard; I deserve this,” or “Everyone else does it.” The employee with a gambling problem might rationalize theft or misappropriation of funds as a way to fund their addiction, viewing it as justifiable under their circumstances (Albrecht et al., 2019). This mental process diminishes the moral barrier to committing fraud, making rationalization a critical factor in the fraud triangle in this context.

Scenario 4: An employee has check-writing and -signing responsibilities for a small company, as well as reconciling the bank account

This scenario underscores opportunity within the fraud triangle. The employee’s combined responsibilities create a segregation of duties flaw, granting unchecked control over the cash process. When one individual manages multiple stages of a transaction cycle without oversight, it increases the likelihood of fraudulent acts going undetected. Internal control principles emphasize separation of duties to mitigate opportunities for theft or errors (COSO, 2013). Without proper segregation, an employee can manipulate records or embezzle assets with reduced risk of detection. This scenario exemplifies how lack of internal controls or oversight provides an opportunity for fraud to occur.

Conclusion

By analyzing these typical workplace scenarios, it becomes evident that each component of the fraud triangle plays a significant role in facilitating occupational fraud. Financial pressures such as personal debts or lifestyle needs can motivate misconduct; opportunities arising from weak internal controls or disparities in compensation can enable fraudulent acts; and rationalization provides the moral flexibility to justify dishonest behavior. Organizations that understand and address these factors through strengthened controls, ethical culture, and employee support are better positioned to prevent fraud and mitigate its impact.

References

  • Albrecht, W. S., Albrecht, C. C., Albrecht, C. O., & Zimbelman, M. F. (2019). Fraud Examination (6th ed.). Cengage Learning.
  • Association of Certified Fraud Examiners (ACFE). (2020). Report to the Nations: 2020 Global Study on Occupational Fraud and Abuse. ACFE.
  • Committee of Sponsoring Organizations of the Treadway Commission (COSO). (2013). Internal Control - Integrated Framework. COSO.
  • Josephson, M., & Runkel, B. C. (2021). Corporate Fraud: Detection, Prevention, and Investigation. Wiley.

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