The term of “fraud triangle” was developed by Dr. Donald Cressey, a criminologist who studied embezzlers. The three basic elements of fraud triangle include perceived pressure, perceived opportunity, and the ability to rationalize. It explains the nature of many fraud offenders and also become a tool to assess the risk of fraud. It is important to companies to incorporate the fraud triangle theory in order to reduce the risk of fraud within their organization. From my standpoint, companies should incorporate the fraud triangle from the following aspects.
First, companies should perform background investigation in order to uncover the perceived pressure. The factors that create pressure include personal financial pressure (high levels of
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In addition, companies should improving their training, supervision and internal control system in order to reduce the perceived opportunity. Opportunity is the perception that a fraud can be committed without detection. Fraudsters will not commit fraud if they do not perceive that they have enough skills, abilities, and information. According to Dorminey, Fleming, Kranacher & Riley (2010), “the opportunity can arise from several sources, including poor internal controls, poor supervision, lack of prosecution of perpetrators and ineffective antifraud programs, policies, and procedures.”
However, unlike perceived pressure and rationalization, opportunity is external quality and can be assessed by auditors and fraud examiner. “Traditionally, opportunity has been examined solely within the context of poor internal controls, especially with respect to the segregation of duties.” (Dorminey, Fleming, Kranacher & Riley, 2010) Besides improving the internal control, companies can also take measures such as implementing fraud assessment questionnaires of employees and training the employees to recognize the warning signs of fraud.
Finally, companies should build strong ethical culture and improve the employees’ benefit in order to prevent the employees rationalize the fraud. Rationalization refers to the fraudster’s ability to explain to him or herself why the theft is not really wrong. “Cressey indicated that a morally