These Shape-Shifting Frameworks Can Help You Fight Fraud

The “fraud triangle” is a three-legged model that explains the generally required conditions for a worker to commit occupational fraud: 1) incentive, 2) opportunity and 3) rationalization. Twenty years ago, fraud professionals expanded the triangle to include another leg — capability — and the “fraud diamond” was born. Since then, the diamond framework has gained considerable support among forensic accountants. Understanding its principles can also help business owners prevent financial crimes in their companies.

From triangle to diamond

The triangle’s basic conditions are simple to unpack. Incentive refers to the motivations that fraud perpetrators experience. They can be personal (such as debt, addiction or a costly lifestyle) or professional (such as pressure to meet certain sales goals or revenue targets). Opportunity generally means that fraudsters believe they can get away with committing crimes. Poor internal controls, weak management oversight and failure to audit may be to blame. Rationalization is the perpetrator’s mental justification. The employee might feel underpaid or mistreated, believe that “everybody does it” or think the employer can afford the financial loss.

Capability, introduced in the diamond model, represents a broader set of material and psychological conditions. It dictates that an individual capable of fraud is typically someone with all or most of the following:

• An elevated job position or access to financial functions,
• Intelligence,
• Confidence,
• Resilience to stress and guilt,
• Authority to lead and even coerce others, and
• Ability to lie and conceal activities.

As you probably recognize, many qualities that can make someone an effective thief can also make that person a successful executive.

Don’t let opportunity knock

Several studies have shown that fraud professionals using the diamond model are better at predicting workplace fraud than those using the triangle framework alone. Because fraud is essentially a people problem, you should carefully screen new hires and get to know employees on a personal level to assess their capacity to commit fraud. That said, it’s important to recognize that most capable individuals don’t ever steal or falsify data — even if other factors would seem to encourage it.

Some capability traits — such as intelligence, confidence and resilience — generally are desirable qualities in an employee. So perhaps a better way for business owners to prevent fraud is to concentrate on opportunity factors. Make financial crimes more difficult to commit by implementing and consistently following robust internal controls that address your organization’s greatest vulnerabilities. This includes ensuring that managers are properly trained and provide adequate employee oversight, and that audits are conducted regularly.

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