The AAT recently updated the Qualification Technical Information (QTI) for Internal Accounting Systems and Controls to include “The Fraud Triangle”. Let’s explore what this model is used for and how it can be applied to internal controls.
The fraud triangle is a framework commonly used to explain the reason behind an individual’s decision to commit fraud. It is made up of three elements:
Opportunity
This is the chance to commit fraud without being caught.
Some examples:
- Absent: where there is a lack of supervision or oversight.
- Ineffective: if the supervision is ineffective.
- Unenforced: if violations aren’t monitored or there aren’t consequences.
- Unmonitored: if it is unlikely that controls will pick it up.
Motive / Pressure
Otherwise trustworthy employees might be tempted with the right motivation.
Some examples:
- Survival: inability to afford life-saving medicines or to put food on the table.
- Status pressure: feeling compelled to keep up with peers’ earning or spending.
- Sudden changes in circumstances: a partner’s job loss, a surprise medical bill.
- A sense of being wronged: being passed over for a promotion or denied a pay rise.
Rationalisation
Even with the motivation and the opportunity most employees will not commit fraud, this is unless they can justify it to themselves that it is ok, or they can convince themselves it is a victimless crime.
Some examples:
- Denial: convincing themselves that they are only borrowing the money and will pay it back.
- Entitlement: perhaps they feel it is their right for all the hard work they have put in.
- Everyone is doing it: an employee may see others getting away with it and think they may as well do the same.
- No alternative: a desperate situation could lead them to think that fraud is their only option.
Impact on internal controls
The fraud triangle can help a business to identify why people might commit fraud within their organisation and take steps to minimise that risk.
Opportunity is the element that the business can directly influence by strengthening existing controls or implementing new controls if they were lacking in some areas.
The business should not ignore the other two factors though. A good corporate culture where employees feel valued, are treated fairly and are remunerated adequately can help to reduce the Motive and Rationalisation.
