As the TED Ed video mentioned, 3 conditions need to be present for fraud to occur

These are known as the fraud triangle

We’ll go through each in detail

1.Incentive/pressure:

A financial or other type of gain that the perpetrator would achieve as a result of committing the fraud. Typically a financial gain.

2.Opportunity:

Perpetrator’s ability to identify the way to commit the fraud. Often arises due to lack of segregation of duties or insufficient internal controls.

3.Rationalization:

Perpetrator’s ability to justify committing the fraud. Rationalization is typically the element which stops employees from committing a fraud – although the incentive and opportunity exist, they are honest and would not commit the fraud due to their own moral and ethical beliefs.

The key words are highlighted here

Incentive – involves some kind of gain

Opportunity – a way to commit fraud

Rationalization – ability to justify the fraud

Examples of pressures that lead to fraud

High personal debt or expenses

Feeling of having an inadequate salary

Bad investments

Avoiding taxes

Greed

Job dissatisfaction

Need for power or control

Jealousy

These are just examples of common pressures that may lead to fraud. Each situation is unique

Examples of opportunities that lead to fraud

Lack of internal controls or lack of enforcement of controls

Lack of supervision over employees

Having certain employees with too much responsibility

Lack of training

Having too much trust in key employees

We’ll discuss the internal controls that can be put in place to mitigate against these opportunities

Examples of rationalizations that lead to fraud

“I deserve it, I work hard”

“I am not causing any harm to anyone”

“I’ve been underpaid so I am just taking what is owed to me”

“Everyone at the company does it”

“I am just borrowing the money and I will pay it back”