The 5 Elements of Fraud:

What Auditors and Compliance Professionals Must Know

Fraud doesn’t happen by accident, it’s essential to understand why fraud occurs — and the conditions that must exist. If you know the elements, you can plan to prevent / detect / respond to them.

Here are five core elements to look out for — when you see all five in place (or trending into place), you’re in high-risk territory.

1. Incentive / Pressure

This is the “why” of fraud – what motivates someone to cross the line. In the classic Fraud Triangle model the element is called pressure or incentive.

What it looks like in practice:

• Unrealistic performance or revenue targets, bonus tied to outcomes, layoffs looming.

• Personal financial problems of an employee (debt, gambling, lifestyle beyond means).

• Pressure from external parties (vendors, customers, business partners) or fear of losing status.

Why it matters: If there is no perceived need (or motive) to commit fraud, the risk is lower. Conversely, when pressure is high — you need a target met, you are under personal strain — then the red-flags go up.

What auditors should emphasize:

• Be alert to “what’s changed”: new metrics, new compensation schemes, suppressed disclosures.

• Ask: Are targets achievable? Are employees talking about feeling squeezed?

• Review personal red flags: living beyond means, unexplained side income, etc.

2. Opportunity

This is the “how” of fraud – the conditions that allow fraud to happen without being caught. In the Fraud Triangle this is the second leg.

What it looks like in practice:

• Weak internal controls, lack of segregation of duties, override of controls.

• Poor oversight (internal audit, management review), complex transactions that mask schemes.

• Access to assets or data without monitoring, inadequate system logs or authorization workflows.

Why it matters:No matter how strong the motive is, if there’s no realistic way to act without risk of detection, many perpetrators won’t attempt fraud (or will at least be stopped early).

What auditors should emphasize:

• Test controls that mitigate opportunity: separation of duties, access controls, independent review.

• Scan for unusual changes: people with both record-keeping and custody; never on vacation; vendor details changed with same person approving.

• Use data analytics: unusual transaction patterns, overrides, manual entries, off-cycle payments.

3. Rationalization (or Attitude & Justification)

This is the “I-can-live-with-this” element. The fraudster must justify the act to themselves. The Fraud Triangle’s third leg.

What it looks like in practice:

• “I’m only borrowing it and will pay it back.”

• “We deserve more; the boss is cheating us anyway.”

• “Everyone else is doing it; I just kept up.”Why it matters:Even with motive and opportunity in place, if someone perceives their action as clearly wrong and cannot rationalize it, the chance of fraud decreases (though not to zero).

What auditors should emphasize:

• Tone at the top matters: culture of ethics makes rationalization harder.

• Consider whether an employee’s attitudes pose a risk: complaints, sense of entitlement, moral disengagement.

• Include ethics and awareness training; make sure employees know the fraud-policy and feel safe raising concerns.

4. Capability

Here’s where many models stop at three elements — but the more advanced view (the Fraud Diamond) adds a fourth: capability (skills, position, confidence) to actually carry out the fraud.

What it looks like in practice:

• The perpetrator has enough system knowledge, access, positional power or technical skill to exploit the situation.

• Ability to conceal their tracks: create false documents, override controls, collude with others.Why it matters:A person may have motive + opportunity + rationalization, but if they cannot execute the fraud (lack skills, cannot override controls, cannot conceal) then risk remains lower.

What auditors/trainers should emphasize:

• Look beyond generic “someone could do this” to “who could do this, given role, tenure, access, skills?”

• Review roles with high capability: senior finance, IT, vendor-management, procurement – these may have elevated risk.

• Consider collusion risk: multiple people acting together increases capability.

5. Integrity / Ethical Backbone (or “line of integrity”)

While not always expressed explicitly in classic models as the “fifth”, many practitioners identify integrity (or lack thereof) as the foundational element. In effect: does the person cross the “line of integrity”?

What it looks like in practice:

• A person who doesn’t see themselves as capable of doing something dishonest, despite a stressful context, will typically stop short.

• A culture where integrity is valued will raise barriers to rationalization and capability to act.

Why it matters: Even if the other four elements fit, the final safeguard is the individual’s integrity (and the organizational environment’s ethical climate). Without that (or if it’s weak), the risk is much higher.

What auditors should emphasize:

• Promote ethics, whistleblower protection, tone at the top.

• Consider integrity when hiring, promoting, rotating assignments.

• Use behavioral red-flags in audits: changes in behavior, living beyond means, refusal to take vacations, close vendor relationships.

Putting It All Together: Why Five Elements?

Fraud is rarely a single stray act. It is typically the result of a confluence of conditions. If you remove or mitigate any one of these elements, the risk drops significantly.

For example:

• If you remove opportunity via strong controls, even a motivated person cannot commit the fraud easily.

• If you bolster integrity and reduce rationalization, you increase the threshold the person must cross emotionally.

• If you identify capability issues (job design, role assignment, access) you restrict who can do it.This resonates with frameworks such as the Fraud Triangle and the Fraud Diamond.

What This Means for Your Audit/Compliance Practice

In CCS's CPE events for auditors and IT professionals, here's what we emphasize in the application of these five elements:

1. Audit Planning – When you plan an engagement, incorporate these elements into your risk assessment. Identify roles, functions, access points, pressures, recent changes.

2. Walk-throughs & Evaluations – Ask about incentive schemes, recent organization changes, control gaps, access changes.

3. Data Analytics & Monitoring – Use data to detect patterns consistent with opportunity + capability (e.g., override entries, unusual logs, vendor changes, manual journals).

4. Culture & Ethics Review – Include questions and surveys about tone at the top, employee perceptions of fairness, experiences with pressure, availability of whistleblower channels.

5. Training & Awareness – Make sure that staff understand the five elements; that fraud isn’t just “someone stole money,” but arises when controls, pressures, rationalizations, capability, and integrity converge.

6. Controls Design – When designing controls, explicitly address each element:

   • Reduce incentives/pressure (realistic targets, monitoring).

   • Limit opportunity (segregation, monitoring, access controls).

   • Challenge rationalizations (ethics training, disciplinary consistency).

   • Monitor capability (who has access + role design).

   • Reinforce integrity (tone at the top, hiring practices).

Conclusion

Fraud is a systemic risk. Understanding the five elements – Incentive/Pressure, Opportunity, Rationalization, Capability, and Integrity/Ethical Backbone – gives you a clearer lens for assessment, detection, and prevention.