A Look at How Technology Intersects With the Fraud Triangle

When a news segment reports highlight an individual guilty of fraud, viewers tend to wonder as to what motivated the individual to commit the crime. For some, they conclude that the person had some deep-seated character flaw. For others, they believe that existing difficulties may have motivated them to commit the act.

None of these views are wrong. In fact, a psychological model exists to take a deeper look at these motivations and the resulting path they lead to. This is the Fraud Triangle. A review of this model, along with how technology relates to it, can be just the tool that safeguards your business from fraud.

What is the Fraud Triangle

Developed in the 1950s by American criminologists, Donald Cressey and Edwin Sutherland, the Fraud Triangle contends that there are three components as to why someone commits the crime. Cressey and Sutherland labelled these components as pressure, opportunity and rationalization.

A look at The Fraud Triangle

A Closer Look the Sides of the Fraud Triangle 

  • Pressure – This describes the perceived need to commit fraud. For example, an employee may feel pressured to commit fraud, because they have to endure financial hardships or perhaps feel like an unappreciated or underpaid employee. Whatever the motivation, the pressure tends to come from a source of significant stress or even trauma.
  • Opportunity – During this stage, an individual sees a window to commit a fraudulent act. For the opportunity to seem worthy of pursuit, the individual must see it as a chance that allows them to reap significant monetary gains with the smallest risk of getting caught. Generally, individuals who spot these opportunities work in departments or with systems where weaknesses in business infrastructure stand out.
  • Rationalization – The “tipping point” so to speak for fraudsters generally occurs at the rationalization stage. This is where the individual starts to justify why committing fraud is worthwhile. At this stage, an employee may delude themselves into thinking that others have committed crimes for noble reasons (ie. saving family from financial ruin).

Realistically speaking, there are many individuals who have found themselves in any one of the three categories. A disgruntled employee may feel the desire to “get back” at their employer. An employee who sees a flaw in a company’s systems may take notice and realize ways they can exploit it. And an employee who’s familiar with the story of a notable fraudster may say that they understand why they committed the crime they did.

However, none of these individuals are likely to act. It’s when the “perfect storm” of all three elements align within an employee that the person becomes more likely to engage in fraudulent activities.

How Technology Meets the Fraud Technology

Cressey and Sutherland coined the term “Fraud Triangle” during an age when the data analytics technology we have now didn’t exist. Therefore, the triangle was far more abstract. However, with powerful analytics technology now in existence, businesses can now target specific parts of the triangle with speed and precision. 

Don’t Give Fraudsters an Opportunity

Technology’s role in preventing fraud has the biggest impact in the opportunity stage. As we mentioned above, fraudsters tend to act on their impulses when they see weaknesses within a business’ systems. In this ever increasingly digital world, these systems rely heavily on technology.

The adage “you can’t fight fire with fire”, although a valuable lesson, doesn’t reign true in the case of digital fraud. The right technology is what your business needs when fraud threatens its operations.

No business has perfect systems or processes. However, management analytics tools continue to advance, making it easier for businesses to monitor their accounts and transactions.

Examples of these Tools Matching algorithms – These algorithms detect anomalies by comparing new and unusual patterns in transaction behaviours to more established ones.

  • Cluster analysis – Clustering involves the grouping of similar objects (or data in this case) into groups in the hopes of finding patterns that could suggest fraud.
  • Time-series analysis – This technique involves looking at transactions and behaviours occurring over a period of time to spot large deviations that may indicate fraud.
  • Data mining – Mining for data involves a series of techniques to analyze large amounts of data to narrow in on specific patterns.
  • AI/ML-based pattern recognitions – Artificial Intelligence and Machine Learning have grown in popularity and these “robots” can detect inconsistent patterns in transaction and financial data.
  • Sequence matching – As its name suggests, sequence matching involves the analyzing of a sequence of “tokens” (useful data points or information) to find inconsistencies.
  • Bayesian networks – This technique involves the association of variables dependent on each other to make an event or condition possible (such as fraud).

GLAnalytics uses its own set of unique algorithms and pattern analysis to detect warning signs of fraud. Some of them resemble the ones mentioned in the list above. This software focuses on patterns within financial statements, looking for inconsistencies, errors and duplications. Ultimately, the program eliminates the need to rely too heavily on external auditors who don’t look for these errors to begin with, and detects fraud months and years before serious damage occurs. 

Using a combination of these tools can no doubt fortify a business against fraud. However, even more important than these tools and processes themselves, is the need to inform staff of their existence. Although it wouldn’t fare well to explain how these tools work (as this could expose flaws), it would create the impression that a business stays a step ahead of criminals. This could deter some from engaging in illicit activity. 

A Strong Defense Makes Fraudsters Reconsider

As discussed earlier, the rationalization phase of fraud serves as the trigger for a criminal to take action. It is often the longest and most difficult for the individual, especially if the decision challenges their values and morals.

However, that person may steer away from committing fraud if there is an openness about the technology being used to track criminal activity.

For this stage, a discussion of technology used to track fraudsters alone may not suffice to deter fraudulent behaviour. It’s also important to remind employees about the consequences and implications of criminal accusations and charges.

Tracking Employees Offline 

Technology has little effect on the starting point of the fraud triangle – pressure. There are no algorithms that can solve someone’s debts, illnesses, or even resentment towards their higher-ups. In these cases, machines take the backseat to man. It is challenging, however, to know what all of your employees are going through, especially if they remain silent about their problems.

However, you can take certain hints based on their performance (some of which can be tracked through technology). You can also keep track of certain behaviours which may suggest some involvement in illicit activity. 

Signs of an Employee Engaging in Fraudulent Acts 

  • Sudden and drastic lifestyle changes or spending habits (buying expensive items unlike before)
  • History of undue risk-taking or addictions that continues on
  • They have access to sensitive accounting and financial data
  • They seem to be taking on more work than usual
  • Trying to establish themselves in positions or roles that seem out of the ordinary
  • Seemingly defensive or more reactive when asked questions about finance-related matters or their role within the organization

It’s important to remember that just because you can tick off any one of these signs, it doesn’t mean that an employee commits fraud. Sometimes, there are reasonable conclusions and reasons to reach first. These questions become more applicable if your data analytics show inconsistencies that may suggest fraud. Only then should you begin investigating your employees. 

Technology and the Fraud Triangle

The Fraud Triangle has existed for several decades, and its coining led to a series of methods used to handle corporate fraud. However, as technology has improved, the tactics for identifying fraud have become more efficient and changed our relationship with the Fraud Triangle.

If you have concerns about fraud and errors within your organization, GLAnalytics can help you take a proactive stance to fight against these crimes. The software’s unique algorithms can find the inconsistent patterns that auditors are not trained (nor concerned) to find, with significantly more accuracy and speed. You can therefore save your organization many hours of precious time, and maintain a sense of trust among staff members.

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