In the literature, factors causing fraudulent actions have long been debated. Discussions have focused on the concept of the Fraud Triangle, which explains the factors leading individuals to engage in fraudulent activities.
No matter how robust an organization’s internal control structure is, the risk of fraud always exists. There is no way to eliminate fraud entirely. As long as human element is involved, fraud will exist.
Factors causing fraudulent actions have long been debated in the literature. Discussions have focused on the concept of the Fraud Triangle, which explains the factors leading individuals to engage in fraudulent activities.
Research on the motivations behind fraud has revealed that perpetrators commit fraud as a result of the convergence of three elements: pressure, opportunity, and rationalization.
Joseph T. Wells, the founder of the Association of Certified Fraud Examiners (ACFE), who has conducted numerous studies on fraud, first named these three elements the Fraud Triangle.
Understanding why fraud is committed necessitates an examination of the fraud triangle.
The three elements of this model are expressed as the fundamental factors underlying individuals’ inclination towards fraud.
Academic findings on the presence of the mentioned three conditions and the components of the fraud triangle will be attempted to be explained.
The fraud triangle is a term widely adopted in the literature and used in identifying and evaluating fraud risk factors.
The fraud triangle, also referred to as fraud risk factors;
Opportunity,
Pressure, and
Rationalization,
consists of three fundamental elements. Even in corporate enterprises, the creation of a fraudulent environment, albeit simple, is frequently encountered.
1- Rationalization Element:
When caught, the perpetrator of fraud may try to justify their actions, claiming that although they knew their actions were morally wrong, they intended to replace the money later and hence did not anticipate being accused. They engage in self-justification efforts to portray themselves as innocent.
Rationalization is the internal dialogue that enables the perpetrator to justify their actions to themselves. The employer convinces themselves that the company owes them this price for their behavior.
Individuals perceive themselves as honest and attempt to justify their criminal behavior when they engage in fraudulent activities. They try to convince themselves to validate the fraud they committed. The common attitude of employees involved in cash theft is their intention to replace the money later. For them, this is not theft; it is borrowing. Sometimes, they see fraud and theft as a way of taking revenge on the company for not treating them well. There are many excuses for these rationalization efforts. For example, “everyone is doing it, why shouldn’t I?”
Managers, on the other hand, try to convince themselves that they distort accounting information in their reports for the benefit of the company and employees.
2- Pressure/Motivation Element:
There is a pressure element that encourages or contributes to motivating the management or other employees to engage in fraud. These pressure factors can include hefty bills, addiction problems, expensive habits, gambling addiction, etc.
Financial pressures are more prominent as a pressure factor. In 2007, a study on fraud identified greed as the main cause of fraud. It is claimed that 63% of the cases in 2007 occurred for this reason.
Most other reasons are attributed to gambling and debt. However, many people are faced with opportunities for fraud, and some greedy and needy people resort to fraud. Especially concerning fraudulent financial reporting as a management fraud, it cannot be said that managers’ income is low.
However, their dissatisfaction leads to greed. This leads to the emergence of some illegal actions. Financial pressures are the main source encouraging employees to misuse assets. Employees with excessive debts, substance abuse problems, or gambling addiction may steal to cover their financial gaps.
Managers should pay attention to signs of these kinds of behaviors in employees who have access to assets and accounting records. During the hiring process for positions where employees can access assets, managers should thoroughly review the backgrounds of applicants. Employees dissatisfied with the company may engage in theft out of a desire to stand out, prove their qualifications, or take revenge on their employer.
Businesses can reduce the risk of fraud by treating employees fairly and keeping their morale high through monitoring them.
The main pressure factors are listed below:
a. The company’s profitability being at risk due to economic, industrial, and operational conditions (such as increased competition in the sector, new legal regulations, excessive operational losses, etc.)
b. The financial situation of the management being tied to the company’s financial situation (such as owning shares of the company, the bonus they receive, and the promotion depending on the company’s performance, etc.)
c. Setting difficult targets for top management (such as sales profitability targets, etc.)
d. Personal financial needs (such as unexpected expenses, illness, bad habits, gambling, etc.)
e. Failure to meet employee expectations from the company (such as not receiving the expected promotion or salary, thinking they will be fired from their job, etc.)
f. Pressures arising from bad habits (such as gambling addiction, drug use, or alcoholism, etc.)
g. Job-related pressures (On the other hand, pressures that can arise from factors within the institution can lead to fraudulent transactions. Unrealistic (impossible to achieve or very difficult) targets are the most obvious reasons. Other examples include being paid lower than the market, not receiving the necessary appreciation and praise from their senior and managers, not getting the expected seniority or promotion, etc.)
3- Opportunity Element:
Opportunities primarily arise from weaknesses in the organization’s internal control system. Additionally, strong positions within the organization, the company’s general non-compliance with laws and regulations, and top-level knowledge of company operations can provide opportunities for fraudulent transactions.
The opportunity factor can be prevented by increasing the effectiveness level of the internal control system and providing fraud training to company employees.
Most of the frauds that occur in companies have resulted from the preparation or concealment of incomplete or fraudulent financial reporting.
The way to combat fraud is through the effective implementation of corporate governance and compliance with audit conditions.
Examples of opportunity factors that may arise in businesses include:
Weakness or absence of the company’s internal control system,
Inadequate monitoring of employee behavior,
Weak ethical policies,
Secret agreements with third parties and partners,
Inadequate evaluation of the quality of work done by employees,
Absence of a disciplined environment where fraudsters will be punished,
Weak flow of information among employees in the company,
Ignorance, indifference, and lack of talent in senior management,
Absence of healthy audit studies.
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