Financial fraud is a serious danger for any corporate. According to the Banking Fraud Investigations Department (BFID), fraudsters stole US$9.4 Million from the banking industry between January and June 2014. This trend in corporate world is increasing in volume, methods and sophistication by the day, and anti-fraud professionals are playing catch up as more ways to defraud individuals, organizations and governments are invented by fraudsters each passing day.

Behaviorists and criminologists have spent plenty of time studying and evaluating the reasons behind crime and why people obey or break the law. There has never been a general consensus on this subject because of the subjective considerations involved. What is acceptable, however, is that to successfully recognize, detect and prevent fraud, every stakeholder has to learn a great deal about human beings and their behavior, both as individuals and groups. No science has been able to predict or shape behavior with pure accuracy because there are many factors at work in the network of actions.

Nevertheless, there has been general acceptance of the three basic factors or circumstances that must be present for occupational fraud to take place, commonly referred to as the Fraud Triangle. This framework has attempted to explain the nature of all occupational offenders and white collar criminals. These three factors, like a triangle come together to facilitate commission of fraud. They explain the reasoning behind a worker’s evaluation to commit a fraudulent action. The factors are;

  • Pressure on the individual’s financial position
  • A perceived opportunity to commit fraud
  • The ability to rationalize their actions.


Pressure on the Individual’s Financial Position

This is the main incentive for committing fraud, and it will be mostly a financial need. The pressure is seen by the individual as personal and secretive such that they may not ask for assistance from their peers who may be able to offer assistance. Generally, these problems threaten the status of the subjects, or threaten to prevent them from achieving a higher status than the one they occupied at the time of the fraud. Management employees have different motivation or ‘need’ to commit fraud when compared with non-management employees.

Non-management or lower lever employees may be motivated to commit fraud by;

  • High personal debt
  • The employee’s spouse lost a job.
  • The employee has many siblings who depend on him for upkeep or school fees.
  • The employee is paying medical expenses for an ailing parent/spouse.
  • The employee is divorced and has expensive child or spousal support payments.
  • The employee has a drug, alcohol, or gambling problem.
  • The employee is attempting to live a lifestyle more expensive than his salary can afford.
  • Peer pressure to match friends with high incomes
  • An overwhelming desire for personal gain.

Management and high cadre employees are motivated to commit fraud in a different way mainly because of the way they are compensated. The compensation packages of most organizations for the top level management employees are designed in such a way that the bulk of their remuneration is tied and dependent on company’s end year results and volumes. They are therefore likely to ‘cook’ the books to reflect a good performance so as to enhance their packages.

Sometimes the pressure could even be non-financial eg. Where someone has to cover poor performance and results to keep their job.

An opportunity to commit Fraud

Regardless of the strength of pressure or motivation, fraud can only take place if and when there is an accompanying opportunity. This is the means by which an employee abuses their position in order to defraud the organization. The perpetrator’s job defines the type of fraud they will commit. When employees have access to assets and information that allows them to both commit and conceal fraud, opportunity cycle is complete. This opportunity may present itself in one of the following forms;

  • Weak internal controls. A strong internal control system prevents fraud in addition to improving effectiveness and efficiency.
  • No separation of duties. For example where the same employee is responsible for bank deposits and preparing bank reconciliation.
  • Poor managerial checks and supervision. When management relents in its duty to perform checks and supervision, they put the organization’s finances in jeopardy. Attention to details must be key.
  • Lack of clear lines of authority and responsibility
  • No separation of custody of assets from the accounting of those assets.
  • A department that is not frequently viewed by internal auditors.
  • Placing too much trust in key employees.
  • Lack of proper procedures for authorization of transactions.

To avoid presenting opportunities for fraud, access must be limited to only those systems, information, and assets that are truly necessary for an employee to complete his or her job.



Rationalisation of the Fraudulent Action

This is the third and final factor in the fraud triangle, which involves the embezzler justifying their action. This is a necessary component since it is the component the fraudster considers to justify his misdeeds, well thought out even before the action is committed. One main mark of occupational fraud and abuse offenders is that once the action is committed, the act becomes more continuous. The fraudster sees himself not as a criminal, but as a victim of circumstance and therefore this appeals to his moral standing.

The most common rationalisations are;

  • I will refund the money.” This is the most common. The employee may have a genuine intention to refund the money after a while. However, more and more ‘borrowing’ increases the ‘soft loan’ to a point that it will not be possible to refund. At this point, the employee becomes careless and the situation escalates until they are eventually discovered.
  • “They are unfair to me.” When an employee feels aggrieved or short changed for some reason, they feel justified to also short change the employer through fraud, to settle scores.
  • “There’s no other way out.” This happens when the employee uses the money to pay for family needs, and feels he has no other way of managing his financial mess.
  • “Everyone does it anyway.” Where an employee feels or sees another employee in the same company doing the same, he considers fraud normal since others are doing it anyway.
  • “I am underpaid yet I work more.” Some employees’ rationale is usually that he works harder than the owner. In the employee’s eye, the owner is vastly overpaid, and, therefore, a little fraud on the part of the employee allows him his justifiable level of remuneration.


Whenever these three factors converge, fraud takes place. We all agree after considering the above that it may be impossible for the management to do anything about an employee’s personal pressures and even the rationalisations. However, the opportunity leg of the triangle is squarely in the hands of the management. If strong internal controls, management oversight, a well designed structure of system authorisations, separation of duties and clear lines of authority are in place, then the incidence of fraud is obliterated.


Written by our CFE and published in the SECURE DIGITAL MAGAZINE


Leave a Comment