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Cressey's Fraud Triangle - Part 1: Perceived Pressure

April 18, 2012 | Comments: 0 | Views: 259

Once upon a time...

Mr. Y had just dropped his mortgage payment and life savings at the poker table in Atlantic City, NJ. Returning home to VA, he became worried and quite embarrassed at losing such a huge sum of money, not to mention this months mortgage payment. He couldn't tell his wife, she would flip out, she wouldn't understand. Mr. Y couldn't borrow the money either as it would cause further embarrassment.

When Mr. Y returned to work on Monday, he "stumbled" upon a way to get the money back. His company EFG Technologies was a rapidly growing company that had lax internal controls. The company only required approval on payments made to vendors that were over $750.00. Mr. Y decided to set up dummy corporations with his wife's initials and use PO boxes to receive the "payments." Mr. Y thought to himself, "once I get that huge Vice President promotion, I can repay the money from the yearly bonus' the company pays all the executives each year."

Mr. Y was able to forge invoices from commercially available software; the accounts payable clerks were overwhelmed with the amount of work volume and they did not check invoices for accuracy. Mr. Y began "billing" his employer for invoices that were under the $750.00 threshold. In a years time he stole over $50,000; enough to make up the mortgage payment and replace his lost life savings.

However, in time, Mr. Y did not get that big promotion he was expecting. Angered by his boss's screw job, Mr. Y continued to bill his employer for the fake invoices and increased the frequency so that he bilked the company of $150,000 in fraudulent payments. Mr. Y felt justified for taking the money since he would have earned as much IF he had gotten that promotion; to make himself feel better he decided to by a new Lexus.

A few months later, Mr. Y's scheme unraveled when internal auditors discovered that his dummy corporations had the same PO boxes. Mr. Y confessed to defrauding the company and was prosecuted and convicted.

Interesting story, wouldn't you say? The story is fictional but it is a common occurrence in today's world. The headlines are full of similar stories such as this one. So what can we learn from this in our pursuit of learning about fraud? The first step is to understand why Mr. Y decided to commit fraud against his employer. We can gain an understanding of why Mr. Y defrauded his EFG Technologies by using Cressey's Fraud Triangle.

Cressey's fraud triangle states that where fraud is present there must be 3 factors. These 3 factors are perceived pressure, perceived opportunity & rationalization. Think of a fire; in order for a fire to burn it must have heat, oxygen and fuel. When all three are present a fire will burn out of control. The same is true for a fraudulent act. When perceived pressure, perceived opportunity and rationalization intersect, fraud is highly likely to occur.

Before I end, let's look at the first component of Cressey's fraud triangle...the perceived pressure. I call it "perceived" since what one person may feel is a pressure may not be a pressure to another. In most cases every fraud perpetrator feels some kind of perceived pressure. Most of the time it is a financial need, like Mr. Y who needed to replace the mortgage payment and his life savings he lost through gambling. However, in some cases the pressure is non-financial in nature. For instance, the underling who is pressured by their superior(s) to report financial results that are better than the company's actual performance.

Pressures can be divided into four main categories: financial, vices, work related and other pressures. Lets look at each one individually.

Financial Pressures

Financial pressures typically involve greed, living beyond one's means, high bills or personal debt, poor credit, unexpected financial needs and personal financial losses. From our example of Mr. Y, he faced financial pressure from losing the money for his mortgage and life savings. One thing to note and we will discuss later, is that financial pressures can be caused by vices, like gambling (in Mr. Y's case).

Financial pressures can sometimes occur without warning (casualty loss), suddenly (vices) or be long-term (disability or sickness). In many cases the fraudsters do not inform others of their financial pressures. From our example, Mr. Y felt he could not tell his wife because she would be angry with him. He felt too embarrassed to reveal he had lost such a significant amount of money to others; others who may have been willing to help him.

Vice pressures

Vice pressures are created due to vices like gambling (Mr. Y), drugs/alcohol or extramarital affairs. Simply put, vices are the worst kind of pressure to commit fraud. Anyone who is willing to go through anything to place that bet, get high or find that thrill from an illicit relationship will definitely look for ways to steal from their employer or commit other types of fraud.

Work-Related pressures

The majority of fraud is motivated by financial or vice pressures. However, in some cases some people will commit fraud to get even with their employer or other people. From our example, we see that Mr. Y decided to continue his fraudulent billing scheme due to being passed over for the Vice President promotion. Other factors that can contribute to fraudulent acts are: getting little recognition for job performance, job dissatisfaction, fear of losing a job or feeling underpaid.

Other Pressures

Finally many fraudsters are motivated by other pressures, such as a spouse who demands a higher standard of living. Sometimes many of us have trouble deciding between wants and needs. We are envious of the brother-in-law that drives the BMW and has the nicer house. Sometimes we all make bad decisions or we are far beyond driven by our vices and they take over our lives. We all are guilty of measuring success by the amount of money someone else has. Don't fall into these traps; concentrate on building lasting friendships and or relationships. Remember life is not all about you, and learn to measure success in other ways than relying on dollars or material possessions.

In my next post, I will discuss part 2 of Cressey's Fraud Triangle, perceived opportunity, stay tuned...

•Thomas R Kaiser Sr. is a Certified Identity Theft Risk Management Specialist in the financial services industry in mortgage banking, identity theft, check fraud and insurance and an Associate Member of the Association of Certified Fraud Examiners.

Source: EzineArticles
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