Why People Commit Fraud: The Fraud Triangle and White-Collar Crime

We open the final section, Fraud Prevention and Deterrence, and it begins with a question that sits underneath everything else: why do people who consider themselves honest commit fraud? Here's the thing the exam wants you to feel — you can't deter what you don't understand. If you don't know what drives a fraudster, every control you build is a guess.

The term white-collar crime, coined by the sociologist Edwin Sutherland, captured a then-surprising idea: serious crime is committed by respectable people of high social status in the course of their work, not just by the stereotypical street criminal we picture. Think about that for a moment. The person committing occupational fraud is usually a trusted, long-tenured employee — a controller, a manager, a bookkeeper — not someone with a record.

That's exactly why fraud is so hard to spot and so damaging when it lands. Understanding the motive behind fraud isn't academic; it tells you which lever an organization can actually pull to prevent it. And the most important model for that is one you already met back in lecture one, so this is a return with deeper purpose.

The Fraud Triangle, from Donald Cressey's study of incarcerated embezzlers, holds that three conditions tend to coincide when an honest person commits fraud. Let's walk each leg with an example, because the exam loves to hand you a scenario and ask which leg it illustrates. Pressure: a non-shareable financial problem — debt, a gambling or substance addiction, mounting medical bills, a lifestyle they can't sustain or can't admit to anyone.

The key word Cressey used is non-shareable; it's a problem the person feels they can't talk about, so they solve it secretly. Opportunity: a way to commit the fraud and, crucially, to conceal it, usually through a gap in controls or a position of trust — the bookkeeper who both writes the checks and reconciles the bank statement. And rationalization: a self-justifying story — 'I'm only borrowing it, I'll pay it back,' 'they underpay me, so they owe me,' 'everyone does it' — that lets them act while still feeling like a good person.

All three usually need to be present at once. This is the most tested model in the entire prevention section, so know each leg cold and have a clean example of it ready to recognize.

Here's the strategic insight that drives everything in this section, and it's a high-value one for the exam. Of the three legs, an organization can rarely touch an employee's private pressures, and you certainly can't reach inside their head and erase the rationalizations they tell themselves. What you can directly attack is opportunity.

Strong internal controls, segregation of duties, active oversight, and a credible sense that fraud will be caught all shrink the opportunity leg. So reason it through whenever a prevention question appears: if pressure and rationalization are largely internal and outside the company's reach, the controllable variable is opportunity. Raising the perceived likelihood of detection is one of the most powerful deterrents there is — note the word perceived, because it's the belief that they'll be caught, not the actual statistics, that changes behavior.

People are far less likely to act when they're convinced someone is watching. That's why so many anti-fraud measures aim at opportunity and at visibility. When the exam asks how to prevent fraud, the answer almost always lives on the opportunity side of the triangle.

A refinement worth knowing is the Fraud Diamond, proposed by Wolfe and Hermanson, which adds a fourth element to Cressey's three: capability. The argument is that pressure, opportunity, and rationalization may all be present, but the fraud still requires a person with the capability to carry it out — the right position and authority within the organization, the technical skills to exploit and hide the scheme, the confidence and ego to believe they won't be caught, and the ability to handle the stress of deceiving others over months or years. Capability explains why two employees facing the same pressure and the same opportunity behave differently: one has the position, nerve, and know-how to execute and conceal a major scheme, the other simply doesn't.

This is a classic exam distractor, so anchor it firmly — the question may describe an employee's smarts or seniority and ask which model that maps to. On the exam, remember the Triangle is the classic three legs, and the Diamond adds capability as the fourth element. If you see 'capability' or 'the right person,' the answer is the Fraud Diamond, not the Triangle.

Let's connect theory to practice, because that's what this section is really about. Since opportunity is the controllable leg, anti-fraud effort concentrates there: tighten controls, separate duties so no one person owns a transaction end to end, surveil and audit, and make detection feel likely. Visibility and real consequences deter the calculating actor weighing risk against reward.

But culture matters too, and this is a subtle point the exam sometimes rewards: a strong ethical tone and a trusted way to report concerns can weaken the rationalization leg by making 'everyone does it' ring false. For the exam, keep the two models straight and don't mix them up: the Fraud Triangle is pressure, opportunity, and rationalization; the Fraud Diamond adds capability as a fourth condition. Tie it back to deterrence — controls reduce opportunity, perceived detection raises the cost, and ethical tone undercuts the excuses.

Next, we look at the structures organizations build to deter fraud — corporate governance, internal controls, and the C-O-S-O framework.