Fraud refers to illegal acts such as policy violations and financial misstatements that are committed by or on an organization. Fraud affects organizations in a number of ways, such as loss of company reputation, values, and finances. The fraud triangle enables organizations to assess fraud risk. Fraud theory asserts three main factors instigate fraud in organizations, and they include rationalization, opportunity, and pressure.
Rationalization
This terminology refers to the conscious decision made by individuals who intend to perpetrate fraud by placing their personal interests above organizational needs. The rationalization may arise from different reasons. For example, the perpetrators may develop a perception that they are underpaid, and hence the act will enable them to take care of their families. Secondly, perpetrators may commit the act by rationalizing the fact that they desperately need the property or asset immediately and will repay later before they can be noticed.
Pressures
This aspect refers to events that occur in an individual’s life either due to personal or corporate reasons. An individual may commit fraud due to personal factors such as financial problems and addiction coupled with various other issues such as drugs, gambling, or shopping. An individual may also be pressured to commit fraud due to his or her desire to show good results.
Opportunity
Individuals may also be attracted to engage in fraud due to control failures or weaknesses, which is further enhanced by the perpetrator’s authorization, position, or responsibilities. Consequently, perpetrators think that they will not be caught, as the organization has not implemented adequate operational reviews and performance reconciliations.