Beyond the ‘red flags’ – The Alternative Fraud Triangle

Tenet Compliance & Litigation’s Arun Chauhan poses an alternative to the original fraud triangle as brought to the fore by Edwin Sutherland and Donald Cressey.

Fraud remains prevalent in all sectors in the UK and internationally – from professional services, to sports, to the supply chain in the food industry.

As an economy, we’re working to better mitigate the risk of fraud – increasing detection, sanction and future prevention.

KPMG’s annual Fraud Barometer report 2019 highlighted that 453 cases came to UK courts last year (2018), totalling a value of £1.2bn. This number is up 78% from 2017 and included one ‘super case’ where the total value of the case exceeded £50m.

However, to best prevent the risk of fraud, we must begin to fully understand why it occurs in the first instance.

The Traditional Fraud Triangle

The traditional fraud triangle suggests that pressure is present, opportunities can be sought and actions can be rationalised by those acting dishonestly. These factors combine to create a high-risk, pressured environment which may allow for fraud to happen. These elements are: pressure on an individual, rationalisation of that individual as to the potentially dishonest actions they may take and having the opportunity within their role to commit fraud.

The traditional model is often credited to Edwin Sutherland and Donald Cressey – stemming from their differential association theory.

It cannot be disputed that these ‘red flags’ are vital in detecting the occurrence of fraud happening right now which may have devastating financial implications, however, it is often said that prevention is better than the cure – and that is certainly true of combatting fraud. Focusing on identifying and reducing risks is key.

Preventing fraud calls us to re-examine the fraud triangle in greater depth, particularly on the trigger of the famed pressure that leads to fraud. Interestingly, the fundamental shape remains but the three points of the fraud triangle differ with culture being at the apex in a front and central role.

The Alternative Fraud Triangle

The three elements of the Alternative Fraud Triangle are leadership, disenchantment and culture:

It is the output of leadership and the culture created that can lead to employee disenchantment. It is that disenchantment that can lead to the famed pressure at the heart of why employees commit fraud as described in the traditional fraud triangle.

Leadership

To achieve a healthy working environment, your employees need to trust their leaders. If your team doesn’t feel protected and part of the team, this can lead to an increased risk of isolation. In turn, employees feel under increased pressure to perform but lack the support they need to achieve the high performance targets set.

Leadership style is closely correlated with employee behaviour. When a leader’s behaviour or style – and the culture it creates – doesn’t align with the team, it can compromise the whole team’s engagement with both the leadership and the whole business.

Disenchantment

Stress and pressure in a working environment can lead employees to feel demotivated and undervalued.

This in turn can lead to tangible disenchantment. At one end of the continuum, this is a team coming to work for the money to the epitome is when a team ‘goes rogue’ or is ‘toxic’.

It has been proven that employee disenchantment has a significant influence on employee fraud (eg Edward Snowden or Nick Leeson).

There are several factors which can contribute to employee disenchantment including poor leadership, unfair processes or unattainable time or income targets. It is important to underpin exactly why employee disenchantment is occurring in order to remedy the situation effectively and ultimately reduce the risk of fraud.

If unmonitored, employee disenchantment can create a vicious cycle of poor working culture prompting more bad behaviour and further disenchantment. From this environment springs out-of-character behaviour ie good people end up doing bad things.

Culture

A small clique of disenchanted team members can demotivate entire teams and inculcate a toxic working culture thereby promoting a high risk of fraud.

It’s important to ensure your business’ culture is working for your team so they remain engaged, motivated and are not inclined to carry out dishonest actions such as fraud.

Protecting your business

For more information as to how you can protect your business from employee fraud, get in touch or visit our services page.

To read more, visit: Accountancy Daily

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