The Fraud Diamond

First, there was the Fraud Triangle. Then came the Fraud Diamond. David Wolfe and Dana Hermanson, the authors of “The Fraud Diamond: Considering the Four Elements of Fraud” (2004), created the Fraud Diamond to better explain how fraud is occurring. Pressure, opportunity, and rationalization aren't enough without someone who has the ability to exploit them.

 The Four Elements of the Fraud Diamond

1. Pressure (Incentive)

The motivation behind committing fraud:

• Personal debt, addiction, family illness
• Unrealistic work targets
• Desire for wealth, status, or revenge

2. Opportunity

The situation that allows fraud to occur:

• Weak or missing controls
• Inadequate oversight
• Access to systems or money without checks

3. Rationalization

The internal justification for unethical behavior:

• “I deserve it.”
• “They don’t pay me enough.”
• “It’s just temporary.”

4. Capability (The Diamond’s Unique Edge)

This is what separates someone who could commit fraud from someone who does. It includes:

• Intelligence and understanding of systems
• Position of authority or trust
• Confidence to override controls or deceive others
• Persistence and ability to exploit weaknesses over time

Capability explains why two people facing the same pressure, opportunity, and rationalization will behave differently. One commits fraud while the other doesn't.

Fraud Prevention

Implementing specific processes and procedures will significantly reduce the likelihood that your business will fall victim to fraud. Here is a checklist your organization can use to limit this risk:

1. Internal Controls

☐ Segregate financial duties (no single person should handle all parts of a transaction).

☐ Require dual signatures on checks above a certain amount.

☐ Reconcile bank accounts monthly and have someone independent review them.

☐ Limit access to financial systems and bank accounts to authorized personnel only.

☐ Use pre-numbered checks and receipts to track funds.

2. Oversight & Accountability

☐ Implement regular (monthly or quarterly) financial reviews.

☐ Require executive or board approval for large or unusual expenses.

☐ Present financial statements regularly to the board with time for questions.

☐ Rotate financial duties periodically (e.g., who reconciles or deposits funds).

3. Transparency

☐ Publish financial statements and annual reports for stakeholders/donors.

☐ Provide clear, written policies for expense reimbursements and spending limits.

☐ Encourage a "no secrets" culture where asking questions about finances is expected and accepted.

4. Whistleblower Policy

☐ Create a formal whistleblower policy to protect employees who report unethical behavior.

☐ Provide a confidential way to report concerns (e.g., email, hotline, or third-party service).

☐ Train staff and volunteers on recognizing red flags and reporting them safely.

5. Ethics & Training

☐ Conduct regular training on ethics, fraud awareness, and organizational policies.

☐ Require all new hires to review and sign a code of conduct.

☐ Model ethical behavior at the leadership level. Culture flows from the top!

Bonus Tips

☐ Track donations carefully. Have separate systems or logs for incoming contributions.

☐ Lock up physical cash and deposit it promptly.

☐ Review payroll periodically for “ghost” employees or inflated hours.

Fraud prevention isn’t about mistrust. It’s about stewardship and protecting your mission. Even a simple system of checks and balances can stop most fraud before it starts.

If your business needs assistance implementing fraud prevention measures, you have access to experienced financial leadership, tailored support, and strategic advice. If you would like to know more about how R&A can help your business, give us a call. We are here to help.