Fraud examiners have used the iconic Fraud Triangle, containing Dr. Donald Cressey's principles, for decades. However, the author contends that Cressey didn't necessarily develop his theories to explain behavior of those who don't have financial needs and are predisposed to committing fraud even before organizations hire them.
I've been involved in fraud examinations of all types for more than 20 years: general white-collar crimes, public corruption, wire and mail fraud and others. Throughout the years I've used the iconic Fraud Triangle too many times to count for discussions and demonstrations. Though I've discovered the illustration adequately explains many frauds, it doesn't explain all occupational fraud. I've worked a number of fraud cases that didn't fit neatly within the model because they involved subjects who didn't have financial need and often stole from the moment organizations hired them.
[See The Executive Fraud Triangle: The great 'I,' a Fraud Magazine "Special to the Web" feature, by Laura Downing, CFE, for another discussion on this subject. — ed.]
In one case, a large Midwestern organization suspended the subject because it had accused him of misusing his position and submitting personal expenses for reimbursement. The organization paid the subject a large six-figure salary and gave him a generous expense account, which allowed him to be a member at two different country clubs, plus travel expenses and tickets to sporting events.
The organization also provided him mileage reimbursement for his personal car even though it provided him with a work vehicle. His wife also worked for the organization with a six-figure salary and an expense account.
During the fraud examination, we discovered the subject had been submitting false receipts for reimbursement, capitalizing expenses when the expense accounts were depleted and he appeared to be operating a personal business that conflicted with his work responsibilities.
When viewed in the context of the Fraud Triangle, two elements of the triangle — opportunity and rationalization — were present, but the third element — financial need — was missing. The subject had the opportunity to commit the fraud because of his position. He also had a strong sense of entitlement and thus had rationalized his way into and through the fraud. However, the subject certainly didn't have any financial needs. He didn't have to engage in the behavior; he simply was stealing without remorse.
This case led me to reflect on many similar cases I've encountered in which subjects stole, without any financial needs. I decided to review the Fraud Triangle again to see if I could determine the reasons why these cases appeared to be exceptions to the paradigm.
The Fraud Triangle has been a staple of anti-fraud discussions ever since criminologist Donald Cressey proposed the theory to understand occupational fraud in the 1950s. Many have used the diagram in countless talks and speeches. (See Iconic Fraud Triangle endures: Metaphor diagram helps everybody understand fraud, by W. Steve Albrecht, Ph.D., CFE, CPA, CIA. This article explains Cressey's, criminologist Donald Sutherland's and Albrecht's roles in developing the Fraud Triangle.)
Cressey observed and identified the three elements after he reviewed the facts of fraud cases and subsequently conducted interviews of convicted fraudsters. He outlined his theories and observations in his book, "Other People's Money: A study in the social psychology of embezzlement." (Montclair: Patterson Smith, 1973)
In his book, Cressey explained that each of these elements of fraud are present in every occupational fraud case. However, the presence of these factors doesn't imply or necessarily mean that fraud is taking place. They are merely red flags suggesting further investigation.
However, one type of employee doesn't fit neatly within the theory: those fraudsters who'd planned on committing fraud from the moment they were hired or became part of their organizations. Many people have committed and been convicted of fraud who didn't have financial needs. Some people just don't have the morals or conscience to refrain from fraud. Apparently, these individuals have character flaws that compel them to commit crimes when they don't need to.
Often, fraud examiners or others will explain in Fraud Triangle presentations that premeditated fraud or an individual's predisposition to commit fraud as "greed" or "greedy behavior," which they often incorporate within the financial need test of the triangle. Sometimes these fraud examiners use lack of morals as a contributing factor to rationalization — the common reasoning is that a weakened moral conviction can make people susceptible to easily rationalizing fraud.
But after reviewing Cressey's methodology I believe that pre-planned or premeditated fraud or a subject's predisposition to commit fraud just aren't types of criminal activity that are incorporated in the Fraud Triangle theory.
Cressey reviewed the cases of 503 inmates at three different prisons. He identified the subjects by reviewing cases involving embezzlement, fraud by bailee, general fraud and other crimes that would be considered embezzlement. He narrowed the initial pool of cases based on his review of the exact criminal charges and case summaries (page 23 in "Other People's Money").
Because many of the cases didn't include facts and circumstances or the type of criminal activity that Cressey wished to study, he eliminated those from the study. In fact, Cressey states that the purpose of the study was "not an explanation of the criminal behavior of a society. Instead, the central problem is to account for the differential in behavior indicated by the fact that some persons in position of financial trust violate that trust" (page 12).
Through the initial screening, he further narrowed the potential interview pool of case subjects to 133 potential cases to study (page 25). Cressey narrowed the cases by only including subjects who had:
The limiting factors appear to specifically exclude cases of premeditated actions or subjects who were predisposed to steal.
The potential subjects answered a preliminary set of questions to help Cressey further refine the pool of potential interviewees. He excluded from the study those who'd admitted to taking a job to conduct a fraud, to stealing for themselves or to conducting the same behavior in the past. Such examples include a man who had admitted to obtaining different driver's licenses to steal truck loads of merchandise (page 22), an individual who admitted taking a job to steal from the company (page 25), someone who admitted to being a "con man" (page 25) and an individual who admitted when he took the money he was going to use it for himself (page 25).
Cressey, in writing his book, was looking to focus his study on the reasons why people who were in positions of trust and who had no previous inclination to steal were suddenly inspired to do so. Specifically, Cressey was looking for subjects who described their actions as having been unplanned at the time of hiring. Cressey eventually interviewed and studied only those individuals who had taken their positions of trust without any predisposition for fraud or pre-planned fraud intentions. Cressey's final hypothesis was:
"Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-shareable, are aware that this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property" (page 30).
Thus, a reading of the final hypothesis of the study, which resulted in the Fraud Triangle theory, will bear testament that his study wasn't intended to summarize all white-collar crime or even all crimes of embezzlement. Cressey based his theory on the study of individuals who had taken their position of trust with the intention of honoring the trust that was given to them.
A discussion of the non-shareable problem element of the theory is necessary because this is the area in which many presenters of the Fraud Triangle include an example of a pre-possessed trait of greed.
Cressey asked individuals to respond to the question of why they didn't violate trust when they'd been placed in other positions of trust "they might have held at previous times, or why they hadn't violated the subject position at an earlier time." He received three common responses: "(a) 'There was no need for it like there was this time.' (b) 'The idea never entered my head.' (c) 'I thought it was dishonest then, but this time it didn't seem dishonest at first.' " (Page 33.)
Cressey used these responses to refine the idea of a non-shareable problem. The non-sharable problem element was the explanation subjects used when asked why they committed fraud on the occasion for which they were convicted when they previously didn't think about it, didn't need the money or didn't believe it was honest. Cressey defined a non-shareable problem as one which the subject believed to be a "financial problem which confronted him could not have been shared with persons, who, from a more objective point of view, probably could have aided in the solutions of the problem" (page 34).
Cressey offers a couple of points of discussion regarding this definition. First, the idea of whether the problem is shareable is a subjective perception. Many times, it's wrong that a person can't solve a problem by sharing it with others. In several cases I've worked, the responses of acquaintances of the subject have been "if they had told me, I could have helped." Thus, if employees would've applied a more objective perspective to their "problem" they might have discussed their issues or problems with those who were in positions to help. In fact, many organizations have established employee assistance programs to encourage employees to discuss personal issues and solutions so that they don't resort to committing fraud.
The second point of discussion Cressey offers is that one subject might perceive that a financial problem is an issue, but another person in a similar position with a similar issue might conclude it's not a problem. Cressey provides an example in which one bank official might perceive a bank failure as a non-shareable problem, but another bank official might perceive the failure as a problem, which he would need to share with the community or other people.
Cressey had these conclusions on non-shareable problems:
Of the three points, the last bears further discussion. Cressey specifically concludes that, based on the individuals and the types of crimes discussed, immorality alone isn't enough to cause non-sharable problems to result in crimes because not all moral transgressions cause crimes. Thus, crimes resulting from immorality are specifically excluded from the actions under investigation in Cressey's study. His exclusion of immorality or greed as causes for fraudulent behavior would suggest another explanation apart from the elements of the Fraud Triangle.
The second part of the Fraud Triangle theory is the opportunity element. I will only touch briefly on Cressey's conclusions as they relate to opportunity:
Again, the summary and conclusions don't address the morality or predisposition of an individual to commit acts of fraud. The element of opportunity is less about motive or reasoning and more about the fact or perception of access.
The third and final element of the Fraud Triangle theory is violators' ability to rationalize their behavior. Subjects adjust their vocabulary to enable themselves to accept their actions. The adjustment is needed, as Cressey points out, to allow them to view their actions as non-criminal, justified or minimize accountability before they act (page 93). The necessity to minimize accountability and justify their actions as non-criminal suggests that the subjects don't have a predisposition to commit crimes. In fact, this language suggests that a subject is looking at minimizing the description of his actions as criminal as opposed to one of the subjects excluded from the study because he described himself as a "con-man." Thus, I believe the preconceived notions of criminality don't exist as part of the Fraud Triangle's rationalization element because they weren't part of Cressey's methodology.
Cressey specifically utilizes the term "violators' vocabularies of adjustment" (page 93) as opposed to rationalization for a few reasons. First, he points out that rationalization in a traditional sense refers to an action followed by a personal justification — thus action, then rationalization. This ex-post facto justification would suggest that a subject was comfortable with his actions without justification. Such a comfort level might suggest a predisposition.
The subjects of the study, however, had justified their actions in advance of their actions. In every case in his study, the rationalization took place before the action. But, in order to find comfort with the action, the subject had to adjust his vocabulary to explain the action in a more acceptable language to themselves. Thus the subject had to find a way to adjust his vocabulary to justify the actions. This adjustment, Cressey contends, is different than normal ex-post facto rationalization.
Secondly, Cressey explains that the term rationalization in its traditional form suggests a verbalization to explain the actions of the subjects to others. However, the term vocabularies of adjustment suggests that the subject is really making himself more comfortable with the actions with or without any verbalization. Thus, stealing might actually be stealing, but if the subject adjusts his vocabulary from stealing to "borrowing," the adjustment will then allow the subject to commit an act that otherwise would've been considered wrong or immoral. Again, the fact that a subject has to adjust his vocabulary to commit that act shows that the subject wasn't predisposed to commit such an act.
Cressey presents a summary of his findings regarding rationalization as a three-part conclusion:
Again, the summary and conclusions suggest that these individuals aren't predisposed to commit violations of trust, but rather they find ways to adjust their vocabularies to rationalize their behavior and they act upon those adjustments. Furthermore, Cressey's third statement in his conclusion above, suggests that offenders tend to accept rationalizations of cultures with which they have come in contact.
Applying that statement to the behavior of an organization, the Tone at the Top mantra, which the ACFE and fraud examiners have preached for many years, takes on a much larger significance. I believe that Cressey is suggesting that employees who are exposed to a culture that creates and accepts these rationalizations will begin to create more individuals who are willing to rationalize. Cressey was preaching Tone at the Top and executive office and organizational ethics in the early 1950s!
Based on my review of the methodology of his study, Cressey chose the subjects of his study to specifically exclude those who'd taken a position of trust with the intentions of stealing or those who were predisposed to theft. He designed the study specifically to examine only those occasions in which people had accepted positions of trust without any inclinations or intentions of stealing, but then they violated their positions of trust through embezzlement. He was looking to find the reason for that change in attitude or the reason why they stole in these cases but not in other cases.
Since his initial study, researchers have expanded its conclusions to explain many different instances of fraud or white-collar crime. However, I believe we should refocus the study's implications on the specific embezzlement cases in which subjects had been in positions of trust and began defrauding from the moment their employers had hired them. The possible result? Organizations will emphasize rigorous background investigations prior to all hiring to indicate any predisposition of fraudulent intent or tendencies.
The Fraud Triangle is a great tool, but it won't always explain why new employees want to defraud your organization. Employees might not steal because they need money but because they just enjoy it.
Robert L. Kardell, J.D., CFE, CPA, CFF, is a special agent with the Federal Bureau of Investigation. He's a member of the ACFE Editorial Advisory Committee.
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