The Fraud Diamond: Expanding the Fraud Triangle

When discussing fraud, Donald Cressey’s Fraud Triangle is often the most referenced model. However, in 2004, David Wolfe and Dana Hermanson introduced the Fraud Diamond, adding a fourth element—Capability—to better explain why and how fraud occurs.

This model suggests that while pressure, opportunity, and rationalization (from the Fraud Triangle) are necessary conditions, fraud often does not occur unless the perpetrator has the capability to commit it.

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What is the Fraud Diamond?

The Fraud Diamond expands the Fraud Triangle by introducing Capability as a critical fourth factor in fraud. Here’s a breakdown of the four elements:

1. Pressure (Motivation)

This is the driving force behind fraud. It could be:

• Financial pressure (debt, addiction, lifestyle demands)
• Work-related pressure (meeting unrealistic targets, job security)
• External pressure (family expectations, social status)

2. Opportunity

Fraud can only happen when there is an opportunity to exploit weaknesses in controls or systems. This includes:

• Poor internal controls
• Lack of oversight by management
• Complex financial systems that make fraud harder to detect

3. Rationalization

Most fraudsters justify their actions to themselves. They may think:

• “I’m just borrowing the money.”
• “I deserve this because I’m underpaid.”
• “Everyone else does it.”

4. Capability (The Missing Piece)

This is what separates potential fraudsters from actual fraudsters. Not everyone who faces pressure, opportunity, and rationalization commits fraud—they also need the capability to do so.

What Makes Someone Capable of Committing Fraud?

Wolfe and Hermanson identified key traits of a capable fraudster:

• Position of power – They have access to sensitive information and authority to override controls.
• Confidence & Intelligence – They understand financial systems well enough to manipulate them.
• Ego & Risk-Taking – They believe they can get away with it.
• Persuasion & Deception Skills – They can mislead auditors, employees, or investigators.

Consider the case of a high-ranking financial officer who has complete control over an organization’s financial reporting. They face financial pressure due to personal debts, and the company lacks strong oversight. The opportunity to manipulate financial records is available, and they rationalize their actions by believing they will return the money once business improves. However, what truly enables them to carry out the fraud is their expertise in financial systems, their authority to override controls, and their ability to conceal transactions. Without this capability, they might have been unable to execute the fraud despite having motivation and opportunity.

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Example: A Case of Fraud Diamond in Action

Let’s take a realistic scenario:

👨‍💼 John is a CFO at a company.

• Pressure: He has huge debts from a lavish lifestyle.
• Opportunity: He controls financial reporting and knows there’s little oversight.
• Rationalization: He believes he’ll return the money when the company is more profitable.
• Capability: As a finance expert, he can manipulate records without getting caught.

Without capability, John may have wanted to commit fraud but lacked the skills. His expertise in finance made the fraud possible.

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Why is the Fraud Diamond Important?

• It recognizes that not everyone with motivation commits fraud.
• It highlights why certain individuals, particularly in leadership positions, pose higher risks.
• It helps organizations design better fraud prevention measures by addressing capability risks.

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Final Thoughts

The Fraud Diamond provides a more complete picture of how fraud occurs. It teaches us that preventing fraud is not just about reducing pressure, opportunity, and rationalization—we must also identify and monitor those with the capability to commit fraud.

🔗 Want to learn more? Check out our previous post on The Fraud Triangle to see how fraud theory has evolved.