The Fraud Diamond Theory

“Fraud” is any activity that relies on deception in order to achieve a gain.

“Fraud” is a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.

“Fraud” is an?intentionally deceptive action designed to provide the perpetrator with an unlawful gain or deny a victim a right.

"The Fraud Triangle" was developed by Dr. Donald Cressey, a criminologist whose research on embezzlers produced the term “trust violators.”?

"The Fraud Triangle" is a framework commonly used in auditing to explain the reason behind an individual’s decision to commit fraud.

The Fraud Triangle illustrates the three (3) fundamental factors that contribute to the risk/likelihood of fraud:

(1) opportunity;

(2) rationalization; and

(3) pressure.

Opportunity

Opportunity refers to circumstances that allow fraud to occur. The business/real-world environment in which the organization operates can give rise to opportunities for the perpetration of fraud.

Examples that provide opportunities for committing fraud include:

• Weak internal controls; and
• Poor tone at the top.

These opportunities could be limited by (for example but not limited to):

• Segregation of duties; and
• Mandatory vacations – Instances of fraud are often found when the person perpetrating the fraud is unable to continue to

• Cover up evidence.

Rationalization

Rationalization refers to an individual’s justification for committing fraud. Examples of common rationalizations that fraud committers use include:

• They treated me wrong; and
• It is only a loan; I will pay it back.

This can be limited by (for example but not limited to):

• Maintaining positive morale and ethical values; and
• Management’s setting an example of honesty and integrity (Tone at the Top).

Pressure

These are the motivating circumstances that drive a person to feel the need to commit fraud.

Examples of things that provide incentives for committing fraud include:

• Internal budgeting and target setting that does not create excessive demand on individuals to meet targets; and
• The need to meet or exceed investor and analyst expectations to ensure stock prices are maintained or increased can create pressure to commit fraud.

This can be limited by (for example but not limited to):

• Being aware of visible indicators, such as employees living above their means; and
• Financial background checks for key personnel.

The Fraud Diamond Theory

"The Fraud Diamond Theory" is viewed as an expanded version of the Fraud Triangle Theory - and was first presented by Wolfe and Hermanson in the CPA Journal in December 2004- In this theory, an element named "Capability" has been added to the three initial fraud components of the Fraud Triangle Theory. It is unlikely for fraud to take place unless the fourth element (i.e., capability) is also present. In other words, the potential perpetrator must have the skills and ability to commit fraud.?

Opportunity opens the doorway to fraud, and incentive (i.e., pressure) and rationalization lead a person toward the door. However, capability enables the person to recognize the open doorway as an opportunity and to take advantage of it by walking through it repeatedly.?

Capability?

This is the situation of having the necessary traits or skills and abilities for the person to commit fraud. It is where the fraudster recognizes the particular fraud opportunity and the ability to turn it into reality. Position, intelligence, ego, coercion, deceit, and stress are the supporting elements of capability.?

For more details:https://www.acfe.com/fraud-resources/fraud-101-what-is-fraud

? All Rights Reserved to the Association of Certified Fraud Examiners (ACFE) and The CPA Journal .

• David T. Wolfe, CPA, is the founder of Glasgow Forensic Group, a forensic accounting firm in Atlanta, Ga., and has served a variety of clients, including top-tier law firms, government agencies, privately held small to mid-sized businesses, and Fortune 500 companies.
• Dana R. Hermanson, Ph.D., is a professor of accounting at the Coles College of Business at Kennesaw State University and currently serves as a research fellow of the Corporate Governance Center at the University of Tennessee.

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