2018

International Journal of Business, Economics and Law, Vol. 16, Issue 5 (August)
ISSN 2289-1552

THE NEW FRAUD TRIANGLE THEORY - INTEGRATING ETHICAL VALUES OF

EMPLOYEES

Gamlath Mohottige Mudith Sujeewa

Mohd Shukri Ab Yajid
Ali Khatibi
S. M. Ferdous Azam
Isuri Dharmaratne

ABSTRACT

Technological advancements and the continual evolution of the global business environment provide both enhanced tools
and additional challenges for perpetration and concealment as well as the prevention, detection and investigation of
employee fraud. Increasingly external auditors and forensic accountants are being asked to play an important role in
helping organizations prevent and detect employee fraud. Detecting employee fraud is not an easy task and requires
thorough knowledge about the nature of fraud, how it can be committed and concealed. This paper aims at broadening
knowledge of external auditors, forensic accountants and other stakeholders on employee fraud and why it occurs. It
explains Cressey’s fraud theory of opportunity, pressure, and rationalization and shows its significance, presents the other
fraud models and relates them to Cressey’s model, and proposes a new fraud triangle model integrating ethical values of
employees that could consider when assessing the risk of employee fraud.

Key words: Employee Fraud, Opportunity, Pressure, Rationalization, Ethical Values

INTRODUCTION

Fraud and financial crimes generally, although complex, have existed since time immemorial, evolving over the centuries and
becoming more complex and difficult to investigate causing catastrophic consequences to businesses and the economy of a
country. Detecting fraud is not an easy task and requires thorough knowledge about the nature of fraud, why it is committed and
concealed (ACFE, Report to Nations, 2016). The fraud triangle developed by Cressey in 1953 is a model for explaining the
factors that cause someone to commit occupational fraud. It consists of three components which, together, lead to fraudulent
behavior: Perceived unshareable financial need, Perceived opportunity and Rationalization (Cressey, 1973). Cressey’s fraud
theory explained why trust violators commit fraud and was widely used by regulators, professionals and academics.

Many companies expect more return from its employees to maximise its scarce resources for wealth maximization of
organizations. It also contributes to an employee ability to rationalize the behaviour even if that employee realizes that the
behaviour is about to engage in unethical, illegal or fraudulent, ultimately leading to occupational frauds in organizations
(Kassem and Higson, 2012). The Association of Certified Fraud Examiners (ACFE) estimated that 5% of business revenue is lost
due to fraud and fraudulent behaviour lasts a median of 18 months before being discovered. The total loss caused by the cases
estimated to $ 6.3 billion, with an average loss of case $ 2.7 million. Furthermore, most discoveries occur more by whistle-
blowers tips than pre design internal control systems providing evidence that 39.1% of fraudulent activities are discovered by
employee tips (Report to the Nation, 2016).

The nature of fraud means that much of its cost is hidden. Because concealment is an intrinsic component of most fraud schemes,
some frauds are never uncovered; further, of the cases that are detected, many are never measured or reported. In addition, most
frauds carry substantial indirect costs, including lost productivity, reputational damage and the related loss of business, as well as
the costs associated with investigation and remediation of the issues that allowed them to occur. The result is the equivalent of a
financial iceberg; some of the direct losses are plainly visible, but there is a huge mass of hidden harm that we cannot see (Report
to Nations, ACFE, 2014).

In the current paper, Cressey’s fraud theory is explained and its significance is highlighted. The paper also assesses the fraud
triangle in light of other fraud models, and proposes a new fraud triangle model that should be considered by external, internal
auditors, forensic accountants and other stakeholders in assessing fraud risk.

LITERATURE REVIEW
The literature review systematically explained fraud triangle theory, fraud diamond theory, and new fraud models developed by
the researchers in order to design the most applicable model to this study. The comprehensive literature review provides the
necessary substance for the overall research findings.

FRAUD TRIANGLE
Cressey, working on his PhD in criminology (1953), he decided to his dissertation would focus on embezzlers. To serve as a
basis for his research, Cressey interviewed about 200 people who had been interacted for embezzling funds. It was formulated
the hypothesis as follows; “Trusted persons become trust violators when they conceive of themselves as having a financial

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problem which is non-sharable, are aware 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 verbalization which enable them to adjust their conceptions of themselves
as trusted persons with their conceptions of themselves as users of the entrusted finds or property” (Cressey, 1973). Upon,
completion of his interviews, he developed what still remains the classic model for the occupational offender. His research was
published in other People’s money: A Study in the social Psychology of Embezzlement. Over the years, hypothesis formulated in
his study has become better known as the fraud triangle. One leg of the triangle represents a Pressure, second leg represents
opportunity and the final leg stands for rationalization. The fraud triangle views them as key conditions that tend to be present
when fraud occurs. Within each of these broad risk categories, many different and specific potential red flags may be visible
within a company.

Figure 1: Fraud Triangle

Opportunity

Pressure
Rationalization

PRESSURE

Pressure, as illustrated by Cressey Donald in 1953, is the incentive that could motivate an individual to be involved in fraud. The
pressure could result from personal problems, such as financial pressures or addiction pressures, or from the work environment.
Management or other employees may find themselves offered incentives or placed under pressure to commit fraud. For example,
remuneration or advancement is significantly affected by individual, divisional, or company performance, individuals may have
an incentive to manipulate results or to put pressure on others to do so. Pressure may also come from the unrealistic expectations
of investors, banks, or other sources of finance (Gupta, 2015).

OPPORTUNITY
Pressure creates the motive for the crime to be committed, but the employee must also perceive that he has an opportunity to
commit the crime without being caught. This Perceived opportunity constitutes the second element. In Cressy’s view, there are
two components of the perceived opportunity to commit a trust violation; general information and technical skill. General
information is simply the knowledge that the employee’s position of trust could be violated. Technical skills refers to the abilities
needed to commit the violation. These are usually the same abilities that the employees need to have in order to obtain and keep
his position in the first place.

RATIONALIZATION
The third and final factor in the fraud triangle is the rationalization. Cressey pointed out that rationalization is not an ex post facto
means of justifying a theft that has already occurred. Significantly, rationalization is a necessary component of the crime before it
takes place; in fact, it is the part of the motivation for the crime. Because embezzler does not view himself as criminal, he must
justify his misdeeds before he ever commits them. The rationalization is necessary so that the perpetrator, can make his illegal
behaviour intelligible to himself and maintain his concept of himself as a trusted person.

Dellaportas (2013) examined the factors that influence accountants to commit fraud and to understand the function of
professional role in the advent of fraud. The data in this study were collected in interviews with four small groups’ male
accountants who were serving a custodial sentence for committing fraud and related offences. The researcher tested the validity
of the Cressy’s fraud triangle theory. It was found that the three elements of the fraud triangle were present in the fraudulent acts
undertaken by the offenders who participated in this study. Rather than one dominant motive, the offenders in this study were
influenced by failed business and investments, greed, revenge. Trusted relationships with clients and the absence of proper
business administration created opportunities to commit fraud that were rationalised by displacing blame, the perception that no
one was hurt, and believing that the stolen money would one day be repaid. This study highlighted the strength of opportunity in
the advent of fraud suggesting that opportunity rather than pressure is a better predictor of different behaviour as well as being
the key to control fraud.

Dorminey et al., (2012) revisited the Fraud Triangle, highlighting recent findings and contemporary thinking in the anti-fraud
community to develop a meta-model of fraud for use in accounting instruction and research. The importance of the Fraud
Triangle is particularly important as a model for assessing the risk of fraud, but it is only one component of an overall audit risk
assessment plan. Explicit reference to the auditor’s responsibility in identifying the risks of material misstatement arising from
fraud is included in the guidance provided by Auditing standards. Identifying fraud risk is a significant element of assurance
services, and necessitates a model reflecting the current thinking surrounding the fraud event. To enhance the understanding of

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ISSN 2289-1552

the fraudster’s motivations and improve the anti-fraud community’s ability to prevent, deter, detect, investigate, and remediate
fraud, researchers and practitioners have offered insights beyond the Fraud Triangle.

Free (2015) reviewed popular frameworks used to examine fraud and earmarks three areas where there is considerable scope for
academic research to guide and inform important debates within organisations and regulatory bodies. The article reviews
published fraud research in the fields of auditing and forensic accounting, focusing on the development of the dominant
framework in accounting and fraud examination, the fraud triangle. From this review, specific avenues for future research are
identified. Three under-researched issues are identified: rationalisation of fraudulent behaviours by offenders; the nature of
collusion in fraud; and regulatory attempts to promote whistle-blowing. These topics highlight the perspective of those directly
involved in fraud and draw together issues that have interested researchers in other disciplines for decades with matters that are
at the heart of contemporary financial management across the globe.

FRAUD DIAMOND THEORY

Wolfe and Hermonson (2004) argued in their research that perceived pressure or incentive might exist along with an opportunity
and a rationalization to commit fraud, fraud is unlikely to take place unless the fourth element is present; capability (capacity). In
other words, potential perpetrators must have the skills and ability to actually commit a fraud. Hence, Wolfe and Hermonson
(2004) in their study, added additional variable; Capability to the conventional fraud triangle developed by Cressey in 1973.
Figure 2, below presents the complete set of elements of fraud diamond theory.

Figure 2: Fraud Diamond Theory

Opportunity

Rationalizatio
Pressure n

Capabilit
y

The authors believe that the fraud triangle could be enhanced to improve both fraud prevention and detection by considering a
fourth element. In addition to addressing pressure, opportunity and rationalization, the researchers four sided “fraud diamond”
also considers as an individual’s capability; personal traits and abilities that play a major role in whether fraud may actually
occur even with the presence of the other three elements.

CAPABILITY
A person’s position or function within a company may give him or her the ability to create or exploit an opportunity for fraud not
available to the others. According to Wolfe and Hermonson (2004) fraudster also has the necessary traits and abilities to be the
right person to pull it off and that this person has recognised this particular fraud opportunity and can turn it into reality. Wolfe
and Hermonson identified important observable traits related to individuals’ capacity to commit fraud. Those threats include; (a)
authoritative position or function within the organization (b) intelligence to exploit the accounting and internal control system (c)
ego and confidence (d) capability to effectively deal with stress.

Abdullahi et al., (2015), noticed that many of the world’s most prominent organizations have experienced large-scale frauds.
These frauds have had disturbing effects on the world’s economy in addition to contributing unnecessary suffering and increased
unemployment for the low and middle class. With the aim of further understanding the fundamental motivations of fraud, this
paper takes an in-depth look at the convergent and divergent of two classical fraud theories which are: (i) fraud triangle theory;
and (ii) fraud diamond theory. This comparison is important to assist anti-graft bodies and organizations in formulating a
practical strategy to prevent and investigate organizational frauds. The paper takes a conceptual approach by first examining the
concept of fraud, then discussing the convergence of the two classical theories, and finally differentiating them. By doing so, the
similarities and differences between them are highlighted and appreciated for fraud prevention purposes. The study uses
secondary sources of information obtained from journal articles, textbooks and the internet. The discussion of the two theories
contributes to the understanding of frauds especially by forensic accountants, auditors, fraud examiners and other anti-fraud
bodies. The study also serves as guidance for further fraud related research.

ETHICAL VALUES
Ethics can be defined as the agreed on standards of what is desirable and undesirable and of right and wrong conduct or behavior
of a person, group, or entity (Cressy et al., 2010). Laczniak (1993) referred to ethics as acts that guide employees on the basis of
moral and behavioral principles. Moreover, Ambrose et al. (2008) viewed ethical values as overall values embraced by
individuals and organizations. Individual ethical values are influenced by behavior and what is thought to be right or wrong.
Meanwhile, Irianto et al. (2009) referred to ethical values as being honest by following company policies and procedures. With

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ethical values present within themselves, any fraudulent activity may be restricted given that employees strongly believe in what
is wrong and right. Mathenge (2014) examined ethical values among enforcement employees, who are found to be easily
exposed to corruption. Hence, high ethical values (competence, confidence, and professionalism) will reduce the likelihood of
fraudulent activities by employees in performing their job.

Shafer et al., (2016), the purpose of the article is to document relationships between accountants’ socioeconomic beliefs and
attitudes and their professional commitment and ethical decisions in a domain-specific context. Specifically, it investigates the
relationships among Chinese tax accountants’ level of belief in the importance of corporate ethics and social responsibility,
affective/normative professional commitment and ethical judgments /intentions in a case involving client pressure to commit tax
fraud. The study employs a survey of tax practitioners employed by public accounting firms in China. The data are analyzed
using linear regression and structural equation modelling.

The stakeholder view, representing both normative and practical support for the importance of corporate ethics and social
responsibility, was strongly and positively associated with professional commitment among tax practitioners. The stakeholder
view also exhibited a strong negative association with intentions to engage in tax fraud. Tax accountants who possessed higher
levels of professional commitment judged tax fraud as more unethical, and such ethical judgments were associated with a lower
likelihood of intending to engage in fraud.

The study performed by Said et al., (2017) attempts to integrate ethical values into the fraud triangle theory in the context of
Malaysian banking industry. The findings revealed that ethical values were negatively related to employee fraud, and two
elements of fraud triangle theory, namely, opportunity and rationalization, were positively related to employee fraud. This
implies that high ethical value is crucial to mitigate employee fraud. To minimize employee fraud, the banking industry should
reduce opportunities and employee negative rationalization through strong internal control. This study contributes to literature on
the occurrences of employee fraud, which is not widely discussed, especially in the context of the banking industry in developing
countries.

FINDINGS
In fact, it is important for auditors and forensic accountants to consider all fraud models to better understand why fraud is
committed. Hence, the above all models should also be regarded as an extension to Cressey’s fraud triangle model and should be
integrated in one model that includes motivation, opportunity, ethics, and fraudster’s capabilities as shown in figure 3 below.

Figure 3: New Fraud Model

Opportunity
Ethics
Pressure Rationalizatio
Ethical n
Values

Capabilit
CONCLUSION y
The current paper aims at broadening external auditors, forensic accountants and other stakeholders’ knowledge about employee
fraud and why it occurs. It explains Cressey’s fraud triangle model and shows its significance, presents the other fraud models
and relates it to Cressey’s model, and proposes a new fraud triangle model that external auditors, forensic accountants and other
stakeholders should consider when assessing the risk of fraud. A thorough literature review was undertaken to achieve the
paper’s aim.

Accordingly, the current study further validates the Cressey’s fraud triangle model and Wolfe’s fraud diamond model and its
significance to combat the employee fraud. Moreover, the current study highlights the significance of incorporating the ethical
values of the employees to those grounded theories based on the empirical evidences. As such, many researchers emphasized that
the high level of ethical values of the employees reduce the likelihood of fraud in business entities. Hence, there should be a tone
at the top to instil ethical culture among the employees of the business entities strategizing top down approach.

The current study develops the new fraud triangle model based on the empirical findings and therefore, the outcomes are limited
to the findings of the other researchers. Consequently, it is suggested to explore the future studies on the significance of ethical
values of employees to mitigate fraud risk in business entities.

MANAGERIAL IMPLICATION
Prevention of corporate frauds reduces anxiety, improves corporate image and builds up confidence of the investors, which is
essential for resource channeling in financial markets. As such, the study addresses on the determinants of corporate fraud and
how to combat against fraud in an entity. The study confirms the applicability and validity of fraud triangle theory and identified
developments incorporated to Cressey’s original model by various researchers. Accordingly, the study suggests to incorporate
ethical values of employees to the fraud triangle. Therefore, the study recommends to inculcate ethical values among the

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International Journal of Business, Economics and Law, Vol. 16, Issue 5 (August)
ISSN 2289-1552

employees of the entity to combat the employee fraud. Hence, the mangers, shareholders and other stakeholders should consider
ethics of employees are very important aspect of managing fraud risk in an entity. Further, it is the responsibility of the
management to instil the ethical culture within the entity to reduce employee fraud in business entities.

REFERENCES

Abdullahi, R., Mansor, N.,Nuhu M.S. (2015). Fraud Triangle Theory and Fraud Diamond Theory: Understanding the
Convergent and Divergent for Future Research, European Journal of Business and Management, (Online)Vol.7, No.28.

Ambrose, M. L., Arnaud, A., & Schminke M. (2008). Individual moral development and ethical climate: The influence of
person-organization fit on job attitude, Journal Business Ethics, 77(3), 323-333.

Association of Certified Fraud Examiners, (2014). Report to Nations, United State of America.

Association of Certified Fraud Examiners, (2016). Report to Nations, United State of America.

Cressey, D.R. (1953). Other Peoples’ Money, Montclair, Glencoe: Free Press.

Cressey, D.R. (1973). Other Peoples’ Money: A study in the social psychology of embezzlement. Glencoe: Free Press.

Cressy, D.R., Cumming, D., & Mallin, C. (2010). Entrepreneurship, governance and ethics.95(2), 117-120.

Dellaportas, S. (2013). Conversations with inmate accountants: Motivation, Opportunity and the fraud triangle, Accounting
Forum 37, 29-39.

Dorminey, J., Scott A., Fleming , Kranacher M., Riley A. (2012).The Evolution of Fraud Theory, Issues in Accounting
Education: Vol. 27, No. 2, pp. 555-579.

Free, C. (2015). Looking through the fraud triangle: a review and call for new directions, Meditari Accountancy Research, Vol.
23 Issue: 2, pp.175-196.

Gupta, P.K.G.S. (2015).Corporate frauds in India – Perceptions and emerging issues, Journal of Financial Crime, Vol. 22 Iss 1
pp. 79-103.

Irianto, G. Novianti, N., Rosalina, K., Firmanto, Y.(2009). Integrity, unethical behavior, and tendency of fraud, Journal of
International studies, 6(2), 144-163.
Kassem, R.,Higson, A. (2012). The New Fraud Triangle Model, Journal of Emerging Trends in Economics and Management
Sciences (JETEMS), Vol. 3, No. 3, pp.191-195.
Laczniak, G.R. (1993),.Marketing ethics: onward toward greater expectations, Journal of Public Policy & Marketing, 12(1), 91–
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Mathenge, G.D. (2014). An Empirical study to Measuring Corruption and Integrity in Kenyan Police Agency: An Ethical
Perspective, Public Policy and Administration Research, 4(2), 67-79.
Said, J., Alam, M.M., Ramli, M., & Rafidi, M. (2017). Integrating ethical values into fraud train\gle theory in assessing
employee fraud: Evidence from the Malaysian banking industry, Journal of International Studies, 10(2), 170-184.
Shafer, W.E., Simmons, R. S., Yip, R.W.Y., (2016). Social responsibility, professional commitment and tax fraud, Accounting,
Auditing & Accountability Journal, Vol. 29 Issue: 1, pp.111-134.

Wolfe, D.T. & Hermonson D.R. (2004). The Fraud Diamond: Considering the Four Elements of Frauds, The CPA Journal,
ProQuest Central.

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International Journal of Business, Economics and Law, Vol. 16, Issue 5 (August)
ISSN 2289-1552

Gamlath Mohottige Mudith Sujeewa

Management & Science University, Malaysia.
[email protected]

Mohd Shukri Ab Yajid

Management and Science University, Malaysia.
[email protected]

Ali Khatibi
Management and Science University, Malaysia.
[email protected]

S. M. Ferdous Azam
Management and Science University, Malaysia.
[email protected]

Isuri Dharmaratne
Management and Science University, Malaysia.
[email protected]

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