Filed under: Fraud Disputes & Litigation

The fraud triangle is the cornerstone to occupational fraud theory and illustrates the three elements that need to be in place for a perpetrator to successfully execute a fraud scheme. This concept, and its three major tenets, have been at the heart of fraud theory for over 40 years. Those three tenets are pressure, opportunity, and rationalization.

The Association of Certified Fraud Examiners has a very effective graphic that provides additional detail into the definition of these three areas. While the fraud triangle is well-recognized by fraud investigators, some argue that additional focal points are essential to this analysis and other shapes have emerged that merit further discussion.

The Fraud Diamond

Rationalization is not as intuitive as the pressure and opportunity. Pressure, the private financial need that may be cured by the fraud, and opportunity, the ability to carry out a fraud made possible by a break down in internal controls, are concepts that are easier to get your arms around. The Fraud Diamond seeks to further define and clarify the concept of rationalization.

As recently published by the ACFE and originally published by forensic accountant David T. Wolfe and professor Dana R. Hermanson (see the paper, The Fraud Diamond: Considering the Four Elements of Fraud), rationalizing wrongdoing remains a critical personal characteristic for fraudsters.

The Fraud Diamond extends thinking beyond rationalization to add a fourth model component — capability — that considers six other individual abilities and traits that are observable. These capability factors include:

  1. Having the right organizational position or function to take advantage of fraud opportunities.
  2. Having the appropriate expertise to take advantage of fraud opportunities.
  3. Having the confidence or ego to take advantage of fraud opportunities.
  4. Being able to coerce others to participate in fraudulent activities.
  5. Being able to deal with the stress associated with committing fraud.
  6. Being a good liar.

As organizations design fraud prevention programs, they certainly need to analyze the ability of individuals to “talk themselves into” a fraud, but the six points mentioned by Wolfe and Hermanson provide meaningful depth to that analysis. Anyone can talk themselves into doing the wrong thing in the right circumstances, but individuals with some or all of these six characteristics have a greater likelihood of committing fraud and may require additional safeguards.

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