The Fraud Triangle on trial

Dr. Donald Cressey’s Fraud Triangle has endured because it’s correct and simple. However, the ACFE has never stated that the triangle can explain every case of fraud. So, be careful when you use the Fraud Triangle in court. The judge might reject it. The Fraud Triangle is a useful tool to help us understand why and how people commit fraud, but it’s not a scientific theory.

If you’re a CFE, or if you’ve been an ACFE member for any length of time, you’ve heard of the Fraud Triangle. It illustrates core principles of the ACFE’s training in understanding how fraud occurs.

In the July/August 2014 issue of Fraud Magazine, Dr. Steve Albrecht, CFE, the ACFE’s first president and one of the foremost researchers on fraud, wrote what I consider to be the definitive history of the Fraud Triangle, “Iconic Fraud Triangle Endures.” I recommend you read this excellent article. I won’t rehash history here, but I’ll borrow Dr. Albrecht’s excellent summary:

The Fraud Triangle states that individuals are motivated to commit fraud when three elements come together: 1) some kind of perceived pressure 2) some perceived opportunity 3) some way to rationalize the fraud as not being inconsistent with one’s values.

I first heard of the Fraud Triangle when I came to work at the ACFE in 1995. Previously, I’d been an attorney in a private, civil practice handling consumer fraud and deceptive trade practices cases. Because I had limited experience with employees stealing from their employers, I was interested in this area. I began reading the writings of Donald Cressey, Steve Albrecht, Gil Geis, and, of course, Joseph Wells.

Making sense of fraud

One of the first things that I learned is that understanding any particular individual’s motivation for engaging in fraud or any type of deviant behavior is extremely complicated. I was privileged later in my career to spend the afternoon with renowned criminologist and ACFE pillar, Dr. Gilbert Geis, CFE, talking about motivations for fraudulent behavior. Finally, I just came right out and asked him, “Why do people commit fraud?” He answered very matter-of-factly, “We don’t know.” Stupid question, I thought, but he went on to say that we really can’t say for certain why one person commits fraud and another one doesn’t when they both need money.

The same is true with any type of criminal behavior. There are innumerable factors that could cause a person to decide to rob a bank: extreme financial pressure, psychological abnormalities, extreme external pressures, hatred of financial institutions or an unhealthy obsession with Bonnie and Clyde.

In the end, it’s difficult to pinpoint an exact cause for any specific act of criminal or anti-social behavior. It’s usually a combination of factors unique to that individual in that particular circumstance.

Explaining the unexplainable

So, if we don’t know for sure why people commit fraud, then isn’t the Fraud Triangle meaningless? 

Even though I can’t get inside the heads of individuals when they commit fraud, we can talk to these individuals later to at least ask them what they were thinking. That’s what criminologist Dr. Donald Cressey (and namesake for the ACFE’s Cressey Award) did back in 1951. In an attempt to understand what motivated people to commit fraud, he went to prisons and talked to people who have been convicted for embezzlement or what he termed a “trust violation.” Cressey claimed that the three factors that were common in individuals he interviewed were: a non-shareable problem, a perceived opportunity for a trust violation and a set of rationalizations that allowed them to believe their actions were acceptable under the circumstances.

In my own experience, I’ve found the same thing. I’ve done interviews with many convicted fraudsters. In virtually every instance, the three basic legs of the Fraud Triangle come into play.

Pressure

Most people don’t steal on a whim. If they’re going to take money or property that belongs to someone else, they typically have a reason. It’s often greed — they want nice things. Or, it could be they’ve bought nice things and they want to keep them, so they believe they need to steal to maintain their lifestyle.

Perceived opportunity

Perceived opportunity almost goes without saying. If a person has been convicted of fraud, obviously, they had the perceived opportunity to do it or else they wouldn’t have been able to perform the act that led to the conviction. In other words, no perceived opportunity equals no fraud.

Stopping right here, I hope you’re thinking, “Gee, this sounds pretty logical so far.” You’re right. It is. I’m aware of no studies or surveys that have found that most offenders had absolutely no need for the money they stole and had absolutely no perceived opportunity to commit the crime.

Rationalization

The last part of the triangle is rationalization. It’s also the hardest part of the equation to describe.

I’ve never talked to a fraudster who wasn’t able to explain in some way how they were able to justify to themselves what they did. The typical employee doesn’t take a job with the thought of stealing. So, when it happens, for whatever reason, they have to convince themselves that they’re not a bad person.

If I commit my first fraud, and I feel terrible about it, then you might expect me to turn myself in. Not surprisingly, that hardly ever happens. On the contrary, fraudsters will do it again, and again and again.

That’s when the rationalizations kick in. Even though I steal repeatedly, I’m not a bad person because:

• I work late, and I’m not paid extra for it.
• The people they hired after me make more than I do.
• Company management is stealing more than I am.
• The company is so large, it will never miss it.
• I’m not hurting anyone.

Hundreds more rationalizations exist.¹

The fact that a thief needs to come up with excuses or reasons for his behavior shouldn’t be controversial. All of us constantly do this to justify overeating, not exercising, not spending enough time with our families, spending too much money and dozens of other things we don’t want to face each day.

The Fraud Triangle has endured because it’s: 1) correct and 2) simple.

Cressey’s brilliance, I believe, was in not overcomplicating what he observed. He interviewed convicted fraudsters and reported the three most common traits he observed. They’re easy to understand and logical.

Not a cure for every ill

However, let me state absolutely that the ACFE (or any other group or person that I’m aware of) has never claimed that every case of fraud follows the triangle. In the excellent book, “Snakes in Suits: When Psychopaths Go to Work,” by Dr. Paul Babiak and Dr. Robert Hare (Harper, 2007), the authors explore the presence of people with psychopathic traits in the workplace. They suggest that 3 percent to 4 percent of people in senior business positions are psychopaths. (Also see the Fraud Magazine article, Identifying Psychopathic Fraudsters, July/August 2008.)

Because I’d like to retain my current employment a few more years, I’m not going to comment on the presence of psychopaths at my employer. However, only look at the case of Bernard Madoff to see that Babiak and Hare might be right. I’m not a psychologist, but I just don’t see how anyone could steal that much money — not just from strangers but from his clients, friends and even family — and not have some type of sociopathic disorder.

Also, predatory fraudsters — a possible subset of psychopaths — often move from business to business just for the thrill of pulling off fraud crimes. And then we have some mean, disgruntled, revengeful employees who’ll steal from their employers. Plus, some top C-suiters will commit fraud not for personal gain but to balance the books or please the shareholders. The Fraud Triangle won’t fit every case, but it fits the clear majority of them.

The value in understanding the basic motivations, opportunities and rationalizations for fraud — particularly in the workplace — is to use that as a framework to help develop employee support programs, internal controls and reporting programs to prevent, deter and detect fraud.

So, the Fraud Triangle is a useful tool to help us understand why and how people commit fraud, but it’s not a scientific theory. Cressey had no control groups. He didn’t interview every individual convicted of a financial crime. He didn’t do a blind study. He simply recorded his observations.

The Fraud Triangle goes to court

I recently read some U.S. court opinions that refer to the Fraud Triangle. I was initially surprised to learn that the cases denied the admission of expert testimony about the triangle because they deemed it “unreliable.”

But after reviewing the cases, I believe many are confused because of the use of the word, “theory.” Cressey’s three factors, which were later presented in a triangle format for easier recall, became labeled informally as the “Fraud Triangle Theory.” Referring to it as a theory in articles and books is fine, but when you label it a “theory” in an attempt to testify about it in a courtroom, you create a host of new issues and problems.

As you might know, all courts, regardless of the country in which they’re located, have rules about the admission of evidence at trials. Surprisingly, the rules often are similar. Although the cases in this article follow the U.S. evidence rules, the rules for your jurisdiction might be similar.

The Federal Rules of Evidence (FRE) govern in the admission of evidence in court proceedings in U.S. federal courts. Most states model their rules after the federal rules.

FRE 702 governs the admission of expert testimony:

Rule 702. Testimony by Expert Witnesses

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:

1. the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
2. the testimony is based on sufficient facts or data;
3. the testimony is the product of reliable principles and methods; and
4. the expert has reliably applied the principles and methods to the facts of the case.

This is a codification of the principles set forth in several cases by the U.S. Supreme Court. In Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993), the Supreme Court stated that judges should act as “gatekeepers” and keep out scientific testimony that isn’t based on the methods of science.

In a related case, Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999), the Supreme Court stated that the judge’s gate-keeping function applies not just in cases dealing with scientific evidence, but in any case involving testimony based on “technical” and “other specialized knowledge.” 

The ACFE’s research team tracked down four U.S. cases that discussed the admission of testimony about the Fraud Triangle. 

The first case was Haupt v. Heaps, 131 P.3d 252 (2005). The dispute involved a developer who claimed the CEO at the company that had hired him as a contractor defrauded him into relinquishing stock back to the company at an artificially low price because of representations about the imminent financial collapse of the company. The developer lost at trial. One of his asserted points on appeal was that the trial court improperly excluded the testimony of his expert about the Fraud Triangle. The developer wanted to introduce testimony that the conduct of the defendant was consistent with the three elements of the Fraud Triangle.

The appellate court agreed with the trial court’s conclusion that “[r]esearch into case law … failed to locate even a single case in which the ‘fraud triangles’ [sic] theory has been adopted as a reliable scientific method in any court of law.” The evidence was rejected for that reason and because the court felt the testimony was more prejudicial than probative.

The court in this case kept referring to the Fraud Triangle as a scientific theory. As I’ve said, it’s not. Therefore, the court’s analysis was flawed because I don’t believe it really understood what the Fraud Triangle was. That’s particularly evident by the court repeatedly referring to it as “fraud triangles.” There aren’t multiple triangles; there’s only one. However, I don’t think the decision to exclude the testimony was incorrect. Saying someone likely committed fraud because they meet the elements of the Fraud Triangle is stretching the concept probably a bit too far for most judges.

Saying someone likely committed fraud because they meet the elements of the Fraud Triangle is stretching the concept probably a bit too far for most judges.

State Farm sought to admit the testimony of an expert that her financial position created “a significant incentive or pressure for her to commit fraud, and that she possesses ‘attitudes, characteristics, or ethical values that could allow an individual to rationalize committing a fraudulent act.’ ”

The trial judge excluded the testimony. In his opinion, he conducted a very well-reasoned analysis of the Fraud Triangle and how it has been used. The judge notes that applying the triangle relies more on professional judgment than “hard science.” 

“Thus,” the judge writes, “it is also unlikely that there is a known rate of error or specific objective controls associated with the application of the fraud triangle. On the other hand, the concept does appear to have wide acceptance among the community of fraud professionals.” He goes on to note that the triangle was incorporated into Statement on Auditing Standards 99 (SAS 99) when it was issued in 2002.

The court stated:

The fact that the fraud triangle appears in the Fraud Examiner’s Manual and in SAS 99 indicates that the concept is widely accepted among professional fraud examiners and is relevant to various types of fraud detection. But that does not mean that it is or was ever intended to be anything more than a general conceptual underpinning of fraud detection theory. … The flexibility of the triangle and its adaptability to different contexts suggest that it might have been intended to be more of a theoretical concept than a set of measurable standards or a specific, practical methodology.
…
Accountants and Certified Fraud Examiners are frequently allowed to testify as experts in fraud cases, but their testimony usually relates to direct evidence that a fraud has occurred, or to descriptive evidence where the expert helps the jury understand various transactions and how they compare with or deviate from certain standards — not to opinion evidence that a person is psychologically at risk to commit fraud. 

These two paragraphs sum up the issues nicely. The triangle is a concept that helps professionals understand the pressures and motivations that lead to fraud. It’s not a scientific theory under Rule 702.

What was he thinking?

The second issue is the problem of allowing testimony that speculates on someone’s mental state. The most recent case, Kremsky v. Kremsky, 2017 U.S. Dist. LEXIS 22794, discusses this problem.² 

The case involved an uncle who sued his nephew and claimed the nephew breached fiduciary duties and committed fraud against the uncle. The uncle sought to admit the testimony of a financial expert. The expert, in addition to his testimony about financial books and records, was slated to testify that the nephew met the elements of the Fraud Triangle and, therefore, had a motive to commit the fraud.

The court, I believe correctly, denied the request. In its opinion, the court notes that an expert witness can’t speak to the subjective belief of a party because it would basically amount to unsupported speculation. The court writes, “Uncle does not cite a case where an expert touting this ‘fraud triangle’ has been permitted to opine as to motive.” It further stated, “An expert cannot speak as to the subjective belief of a [party].” 

Even though we can find only a limited number of cases involving the Fraud Triangle, I believe we can make some general observations.

First, if you want to talk about the Fraud Triangle in court, don’t call it a theory. To a judge, that sets off a linguistic switch that starts him down the Daubert and FRE 702 path of “Is this theory scientifically proven and reliable?” It isn’t. 

Second, can you use the elements of the Fraud Triangle to show someone has the propensity (or not) to commit fraud? Probably not. It’s a tool that we can use to better understand rationalizations, opportunities and the reasons why people commit fraud. It was never designed as a litmus test to determine whether a particular individual is or isn’t a fraudster.

Expert witnesses can’t use the Fraud Triangle (or anything else that I’m aware of) to speculate about the mental state of a person accused of fraud. Courts are very wary of “state of mind” evidence in all cases. Often, that’s a matter that the jury will be asked to determine: “Did the defendant intend to do the act in question?” In fact, under FRE 704, expert witnesses in criminal cases “must not state an opinion about whether the defendant did or did not have a mental state or condition that constitutes an element of the charged defense.” 

Stick to the facts when you testify

Actions speak louder than words. If you’re asked to testify in a case (civil or criminal) about certain conduct and whether it’s fraudulent, stick to the facts — what you can show objectively. You can still testify about motive and perceived opportunity. Was the defendant deeply in debt? That’s a fact. Did the defendant have access to the missing funds? That’s a fact. Can you show that the defendant hid or concealed documents or information? Those are facts that show intent.

Paraphrasing what the judge stated in Travis, expert evidence from fraud examiners is usually related to direct evidence that fraud has occurred or to descriptive evidence that will help the jury understand transactions and how they compare with or deviate from applicable standards.

If you keep that in mind, your time on the witness stand will be much more comfortable.

John D. Gill, J.D., CFE, is the ACFE’s vice president – education and an ACFE faculty member. His email address is: jgill@ACFE.com.

¹ In her book “Willful Blindness: Why We Ignore the Obvious at Our Peril,” (Bloomsbury, 2011) author Margaret Heffernan describes numerous examples of how persons adapt to uncomfortable situations by simply ignoring them or convincing themselves that the situations aren’t as they appear. She includes a number of examples ranging from companies ignoring public health concerns of their products to massive frauds and thefts.
² I don’t discuss the third case we found involving the Fraud Triangle, Broyles v. Cantor Fitzgerald & Co., 2016 U.S. Dist. LEXIS 76429. It’s a short opinion that relies on the Travis case (which I discussed previously) to exclude testimony from a forensic accountant regarding the Fraud Triangle. The opinion is written by the same judge who authored the decision in Travis. Not surprisingly, he reaches the same conclusion: Forensic accountants and fraud examiners can testify about matters that will aid the jury, but they can’t use the triangle to speculate about a defendant’s mental state.