The Fraud Triangle and Conflicts of Interests

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The Fraud Triangle explains that fraud typically arises where pressure, opportunity, and rationalisation converge. While this model is often applied to financial misconduct, it is equally relevant to understanding and managing conflicts of interests.

Conflicts of interests do not automatically result in fraud or corruption. However, unmanaged conflicts can create precisely the environment in which the elements of the Fraud Triangle take hold. By viewing conflicts of interests through the lens of the Fraud Triangle, organisations can better identify risks before they escalate into misconduct. This is particularly important given the relatively new duty on organisations to prevent fraud.

What is the Fraud Triangle?

Fraud rarely occurs in isolation or without warning signs. While individual motivations vary, research and practical experience consistently show that most frauds share common underlying drivers. One of the most widely recognised frameworks for understanding these drivers is the Fraud Triangle.

Developed by criminologist Donald Cressey in the 1950s, the Fraud Triangle explains that three elements must typically be present for fraud to occur: Pressure, Opportunity, and Rationalisation. When these three factors converge, the risk of misconduct increases significantly.

Understanding this model is essential for organisations seeking to strengthen their fraud prevention and governance arrangements.

The Three Elements of the Fraud Triangle

1. Pressure (or Incentive)

Pressure is the motivating force behind fraud. It is the reason an individual feels compelled to act dishonestly.

Pressures can be financial or non-financial and are often personal. Common examples include:

• Personal debt or financial hardship

• Gambling problems

• Lifestyle expectations beyond means

• Performance targets tied to bonuses or promotions

• Fear of job loss

• Desire to meet unrealistic organisational expectations

It is important to note that pressure does not excuse misconduct. Many people experience financial or professional stress without committing fraud. However, pressure creates vulnerability—particularly if the other two elements of the triangle are also present.

In corporate environments, excessive performance pressures or poorly designed incentive structures can unintentionally contribute to risk.

2. Opportunity

Opportunity is the gateway to fraud. Even when pressure exists, fraud cannot occur unless an individual perceives that they have the chance to commit it without being detected.

Opportunity often arises from weaknesses in internal controls, such as:

• Poor segregation of duties

• Lack of oversight or supervision

• Weak procurement or approval processes

• Inadequate audit trails

• Excessive trust in long-serving employees without verification

• Ineffective governance or compliance monitoring

For example, an employee who can both approve and process payments without review may have an opportunity to divert funds. A procurement manager who controls supplier selection without scrutiny may have the opportunity to favour a connected party.

Of the three elements in the Fraud Triangle, opportunity is the one organisations can control most effectively. Strong governance, robust internal controls, and active oversight significantly reduce fraud risk.

3. Rationalisation

Rationalisation is the internal justification that allows individuals to view their fraudulent behaviour as acceptable.

Most people do not see themselves as criminals. Instead, they create narratives that make their actions seem reasonable or temporary. Common rationalisations include:

• “I’m only borrowing the money.”

• “I deserve this — I’m underpaid.”

• “The company won’t miss it.”

• “Everyone else is doing it.”

• “I had no choice.”

Rationalisation allows individuals to maintain their self-image while engaging in misconduct. It is often influenced by organisational culture. In environments where unethical behaviour is tolerated, ignored, or inconsistently addressed, rationalisation becomes easier.

Conversely, strong ethical leadership and clear consequences make rationalisation more difficult.

The Fraud Triangle and Conflicts of Interests

1. Pressure: How Conflicts of Interests Intensify Incentives

Pressure is the motivating force behind dishonest behaviour. In the context of conflicts of interests, pressures can arise from both financial and non-financial sources.

Financial Pressures

• Personal debt or financial difficulty
• Commission-based pay structures
• Bonus incentives linked to specific outcomes
• Shareholdings in companies bidding for contracts

If an individual stands to gain financially from a decision they are responsible for, the pressure to favour that outcome increases.

Non-Financial Pressures

• Loyalty to friends or family
• Desire to help a former employer
• Political or reputational alignment
• Career advancement ambitions

For example, a regulator seeking future employment in the sector they oversee may feel subtle pressure to make decisions that preserve relationships. A manager recruiting a relative may feel pressure to “do the right thing” for their family.

In both cases, the conflict of interest creates a situation where personal motivations begin to compete with professional duty.

Key insight: Conflicts of interests often amplify pressure, particularly where personal gain or loyalty is involved.

2. Opportunity: When Conflicts Create Access and Influence

Opportunity is the gateway to misconduct. In the realm of conflicts of interests, opportunity arises when individuals are placed in positions where they can influence decisions that affect their own interests.

Common examples include:

• A procurement officer involved in evaluating bids from a company in which they hold shares.
• A board member voting on a matter affecting a connected organisation.
• A manager overseeing a contract held by a close associate.

If there are weak governance processes—such as no declaration requirements, poor oversight, or limited transparency—the opportunity to act in self-interest increases.

Crucially, even if no improper action occurs, the perception of opportunity can damage trust.

Key insight: Effective conflict management removes opportunity by requiring declaration, enforcing recusal, and ensuring oversight.

3. Rationalisation: Justifying Bias and Partiality

Rationalisation is often the most subtle and dangerous element of the Fraud Triangle. It is the internal narrative that allows individuals to justify behaviour that may be ethically questionable.

In conflict of interest scenarios, common rationalisations include:

• “I’m still choosing the best supplier — they just happen to be connected to me.”
• “No one else is as qualified as my relative.”
• “This gift won’t influence my decision.”
• “I deserve the commission; I worked hard for it.”

The individual may genuinely believe they are acting objectively. However, the existence of a conflict makes impartiality more difficult, even if subconsciously.

Where organisational culture tolerates blurred boundaries or inconsistent enforcement, rationalisation becomes easier.

Key insight: Strong ethical culture and clear expectations make rationalisation harder to sustain.

Conflicts of Interests as a Precursor to Fraud

Unmanaged conflicts of interests do not automatically lead to fraud. However, they can provide the conditions in which all three elements of the Fraud Triangle align:

• A financial incentive or loyalty (pressure)
• Decision-making authority (opportunity)
• A belief that the behaviour is justified (rationalisation)

When this happens, the risk shifts from “conflict” to potential corruption, bribery, abuse of position, or fraud.

For example:
A procurement manager with shares in a supplier (financial interest) participates in a tender process (opportunity) and convinces themselves that the supplier genuinely offers the best value (rationalisation). If controls are weak, that conflict can evolve into misconduct.

How Managing Conflicts of Interests Disrupts the Fraud Triangle

The good news is that effective conflict management directly disrupts the Fraud Triangle.

1. Reducing Opportunity

• Clear declaration processes
• Registers of interests
• Segregation of duties
• Recusal from decision-making

These mechanisms remove the structural conditions that enable bias or abuse.

2. Reducing Rationalisation

• Strong codes of conduct
• Ethical leadership
• Transparent processes
• Consistent enforcement

When expectations are clear and culture is strong, it becomes much harder to justify misconduct.

3. Addressing Pressure

• Sensible incentive structures
• Support mechanisms for staff wellbeing
• Clear rules around gifts, hospitality, and secondary employment

By recognising where incentives may create undue pressure, organisations can redesign systems before risks materialise.

Culture: The Critical Link

The relationship between the Fraud Triangle and conflicts of interests highlights the importance of organisational culture.

Where culture encourages:

• Transparency
• Early disclosure
• Open discussion of dilemmas
• Fair and proportionate management of conflicts

risks are identified early and addressed appropriately.

Where culture discourages disclosure or prioritises results over integrity, conflicts are more likely to remain hidden until damage occurs.

Conclusion: A Preventative Lens

The Fraud Triangle provides a valuable preventative lens for managing conflicts of interests. It reminds organisations that risks are rarely accidental; they arise when pressures, opportunities, and rationalisations align.

By:

• Identifying conflicts early,
• Removing decision-making opportunity where appropriate, and
• Strengthening ethical culture,

organisations can break the triangle before it forms.

Conflicts of interests are not merely compliance issues. They are early warning indicators. Managed well, they protect integrity. Ignored, they can become the starting point for fraud.