Our second topic of interest is to learn about why and how fraud happens. And the easiest way to understand this is to look at what fraud experts refer to as the fraud triangle. There are generally speaking three conditions that enable a fraud to happen. The first condition is the incentive and pressure. These can be organizationally driven by a senior management team that is intolerant of failure or can be individually driven by personal circumstance, such as the need of money to me personal obligations arising from a financial crisis, addictions medical bills etc. The second condition is the attitudes in the rationalization at the organizational level, the attitudes of management often dictate the attitudes of the organization.

Senior management were aggressive cheaters themselves are more likely to have an employee population that does so as well. Individual, rational ization is somewhat trickier to identify and predict. Individuals can conjure up all sorts of rationalizations to justify their fraudulent acts such as it's a loan, I'll pay it back, or I'm entitled to it because of all the extra work I do, or how about everyone else is doing it. The third condition of the fraud triangle is opportunity. This is the condition that the organization has the most influence over. Because it speaks to the actions senior management take to prevent and detect fraud from occurring in the first place.

Senior management is responsible for developing a strong set of internal controls that makes it difficult for an employee to perpetrate a fraud detected. Understanding opportunity answers our question of how a fraud happens, whereas the rationalization and incentive components answer the question of why a fraud can happen. Let's stop our discussion here on this particular topic. In the next lesson, we're going to look at how fraud can be both prevented and detected. Until then don't stop together. Stop, stop, don't stop.