Metaphor diagram helps everybody understand fraud
One of the creators of the venerable Fraud Triangle describes its history, rationale and uses for preventing, deterring, detecting and investigating fraud (and other crimes).
All students of anti-fraud principles — whether in higher education or on the job —eventually learn about the seminal Fraud Triangle. We can find this diagram in fraud examination, accounting, auditing and marketing literature. The Fraud Triangle is universally accepted in almost every setting in which fraud is described or analyzed.
The triangle states that individuals are motivated to commit fraud when three elements come together: 1) some kind of perceived pressure 2) some perceived opportunity and 3) some way to rationalize the fraud as not being inconsistent with one's values. (See "The Fraud Triangle" below.)
...MORESUTHERLAND'S DIFFERENTIAL ASSOCIATION
Because of my early fraud research in business, many have asked me if I was the person who first developed this triangle. The answer is yes and no. In this article, I'll present a brief history of how the Fraud Triangle came to be.
Two individuals who probably deserve the most credit for the fraud model are early criminology researchers Edwin Sutherland and Donald Cressey. Sutherland developed the "differential association" theory of why people commit crimes. In his view, criminal behavior is linked to a person's association with a criminal environment. He believed that people encounter various social influences throughout their lives. Some individuals have social interactions with individuals having criminalistic tendencies and so become criminals as a consequence of this association. The major elements of Sutherland's differential association theory can be summarized as follows (Sutherland and Cressey, 1978):
(See "Criminology," by Edwin Hardin Sutherland and Donald Ray Cressey, Lippincott, 1978.)
- Criminal behavior is learned; it's not inherited, and the person who isn't already trained in crime doesn't invent criminal behavior.
- Criminal behavior is learned through interaction with other people through the processes of verbal communication and example.
- The principle learning of criminal behavior occurs with intimate personal groups.
- The learning of crime includes learning the techniques of committing the crime and the motives, drives, rationalizations and attitudes that accompany it.
- A person becomes delinquent because of an excess of definitions (or personal reactions) favorable to the violation of the law.
HT: Going Concern who writes:
Times may change and fraud schemes may evolve with those changes but for the most part, the root cause and therefore the subsequent behavior of would-be fraudsters generally remains the same. As the Journal of Accountancy wrote way back in 2000:
It’s said that accountants’ predecessors were the scribes of ancient Egypt, who kept the pharaohs’ books. They inventoried grain, gold and other assets. Unfortunately, some fell victim to temptation and stole from their leader, as did other employees of the king. The solution was to have two scribes independently record each transaction (the first internal control). As long as the scribes’ totals agreed exactly, there was no problem. But if the totals were materially different, both scribes would be put to death. That proved to be a great incentive for them to carefully check all the numbers and make sure the help wasn’t stealing. In fact, fraud prevention and detection became the royal accountants’ main duty.Harsh. I bet if the PCAOB had the legal authority to hand out the death penalty, audit failure rates would drop to zero almost overnight....MORE
