What Is Cressey's Fraud Triangle

Cressey's fraud triangle includes three elements that must be present in order for an individual to commit fraud: perceived pressure, perceived opportunity, and rationalization. A perceived pressure is a non-shareable financial or non-financial problem that motivates an individual to commit fraud. Financial pressures often include greed, meeting shareholder expectations, and maintaining a desired lifestyle. A perceived opportunity includes an individual's knowledge and position to commit and conceal fraud. Perceived opportunities occur when a company has a lack of effective internal controls. Rationalization includes an individual's justifications as to why his or her actions were not criminal. Examples include “I did nothing wrong” or “I deserve this money than the company does” (The Fraud Triangle 2017). 

Example 1: As a small share owner of Wayland Manufacturing Company, Newbaker wants them to succeed and go public within four to five years. He could try to overstate inventory and equipment to improve the company's overall financial health. However, overstating inventory increases the Purchases account, which ties into the

calculation of Cost of Goods Sold. Increasing Cost of Goods Sold lowers the company’s Gross Profit and Net Earnings. The company is expecting their first ever loss, so why would Newbaker want to make it worse? If he decides to commit Accounts Receivable Fraud by reporting fictitious revenues, his rationalization is helping the company thrive (Arens, Elder, & Borsum 2013) (The Fraud Triangle 2017) (Why Does Inventory Get Reported on Some Income Statements? 2017).

Example 2: However, unforeseeable circumstances can immediately change Newbaker's need to commit accounts payable fraud.

For example, Newbaker has some gambling debts that he needs to repay. This perceived financial pressure now becomes his motivation to commit fraud. Since he also fulfills dual roles in the company, he can use his knowledge and expertise enable to commit and conceal the fraud. He can create fictitious vendor invoices that mirror legitimate invoices previously paid. He could then use his approval authority to verify the invoices’ accuracies as well as issue and sign the checks. He may rationalize his fraudulent activity by either thinking that he's not going to get caught or they can I'll be able to replace the funds later (Arens, Elder, & Borsum 2013) (Accounts Payable and Disbursements Fraud 2016) (The Fraud Triangle

2017).

The fraud risk assessment shows that Wayland Manufacturing Company has many vulnerabilities in their accounting department, which need to be addressed in a plan to be fixed. Currently, the accounting tasks are being handled by the company’s Chief Accountant, Fred Newbaker due to high employee turnover. The high employee turnover shows that the Accounts Payable accounts had been maintained by many personnel. Therefore, former employees with access to the company’s systems and could have manipulated transactions and created fake invoices before leaving. The lack of a separation of duties and a third party approval system makes the accounting department more susceptible to fraud vulnerabilities. In addition, the lack of effective internal controls over the Purchases and Accounts Payable accounts result in added fraud risk. The varying general ledger postings from are cause for concern, especially November with $1,314,985.62. The company will need to test and modify its internal controls to ensure that the information being provided is reliable and accurate. (Wells & Gill 2007) (Arens, Elder, & Borsum 2013) (Red Flags and Prevention Tips for Accounts Payable Fraud 2015).