Definition
The fraud triangle is a model, first described by criminologist Donald Cressey, in which fraud needs three things at once: pressure or incentive, a perceived opportunity to commit and conceal it, and a way to rationalize the act. AU-C 240 describes the same three conditions (incentive or pressure, opportunity, attitude or rationalization) and organizes its example fraud risk factors around them.
Why it matters in an audit or review
The model gives the engagement team a structure for the fraud brainstorming session and for inquiries of management. The auditor can influence opportunity more than the other two sides, because opportunity depends on controls, oversight and access. Pressure and rationalization are harder to see, so they are inferred from targets, compensation, covenants and tone.
Example
Illustrative: a branch manager's results are ranked monthly and tied to a bonus (pressure). She alone approves credit memos and reconciles the cash drawer (opportunity). She tells herself the company will not notice a small timing shift (rationalization). The auditor sees the first two in the process walkthrough and adds a test of credit memos issued just after period end.
Common mistakes
Using the triangle as a pass/fail test. Absence of an observable pressure does not mean low fraud risk.
Sources
- AICPA, AU-C Section 240, Consideration of Fraud in a Financial Statement Audit
- Cressey, D. R., Other People's Money: A Study in the Social Psychology of Embezzlement (1953)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error