About Board and Fraud

Board and Fraud is a blog that aims to bring a practical approach to issues facing the board of directors and the audit committee specifically in the area of governance, risk management, compliance, and internal audit, with a strong focus on fraud, ethics, and internal controls.

Fraud Pentagon – Enhancements to the Three Conditions Under Which Fraud May Occur

Today’s fraudster is clever and operates in an environment ripe for criminal activity. Economic unrest is making it easier for employees to find ways to set fraud in motion – and a new breed of offenders is finding cunning ways to do so. After more than 60 years, the classic fraud triangle of three elements or events that motivate an employee to cross the line has morphed into the Fraud Pentagon. Company boards and senior management must take an offensive stance against the five conditions that precipitate fraud with a clear plan that limits the opportunity for fraud and minimizes the impact when fraud does occur.
axelrod arrogance
Arrogance and Competence


It was early in my career as a forensic accountant. I remember reading about Michael I. “Mickey” Monus the president of Phar-Mor, Inc., a now-defunct national deep-discount drug and grocery retail chain and how Mr. Monus and the company’s chief financial officer, Patrick Finn, colluded to hide Phar-Mor’s losses by altering the company’s books.

I also remember watching the PBS show Frontline in 1994 on “How to Steal $500 Million Dollars”, which was about Mickey Monus and the Phar-Mor fraud.

While many lessons could be learned from Phar-Mor, the one that stuck with me and seemed to be hidden in plain sight was the behavior of Mickey Monus. So, knowing that fraud is not about obstruction, but first deflection, deception, and distraction, I was convinced the “human element” must have been ignored.

Not too long after Phar-Mor, there was Cendant and Walter Forbes; Enron and Ken Lay, Jeff Skilling and Andy Fastow; WorldCom and Bernie Ebbers, HealthSouth and Richard Scrushy; Tyco and Dennis Kozlowski; and finally Bernard L. Madoff Investment Securities and Bernie Madoff. It was Madoff that prompted and motivated me to act, and so I did.

I remember sitting in my office and asking myself, how was this missed? So I grabbed a few dry erase markers and on the whiteboard in my office started profiling Madoff along with the individuals I mentioned above and some others. I spent over a month working on and off researching and profiling. When I was done, I had concluded that Donald R. Cressey’s theory of the three elements that must be present and come together for occupational fraud to take place, which are Pressure, Opportunity, and Rationalization was sound, but needed to be updated based on the profiling exercise I went through and the passage of time, which I expand on below. So I added two additional elements, “(Perceived) Competence and Arrogance”, which are human elements, and thus the Fraud Pentagon was officially born.

Copyright 2010      Jonathan T. Marks, CPA

The Five Elements of the Fraud Pentagon

Knowing what might provoke an employee, even an otherwise lawful individual, to blur the line between legal and illegal activity is the key to fighting fraud effectively. Famed criminologist Donald R. Cressey first identified three elements – opportunity (including general knowledge and technical skill), pressure, and rationalization in the 1950s to explain why people commit fraud. Cressey’s elements help to explain many but not all situations.

Fraud is more likely to occur when someone has an incentive (pressure) to commit fraud, weak controls provide the opportunity for a person to do so, and the person can rationalize the fraudulent behavior. Although, according to Sam Antar, a White Collar Criminal, he didn’t rationalize anything. He just acted and didn’t care.

Today’s fraudster is more independent-minded and armed with more information and access to corporate assets than was the perpetrator of Cressey’s era. Corporations have evolved to rely more heavily on outsourcing, global partnerships, and the technology that links them together. The corporate ladder structure common in the 1950s has given way to matrix organizations where individuals with greater autonomy have the authority to effect change across the organization. Performance-based pay and rewards, commonly replacing step-up pay structures, create greater incentives for employees to find unethical ways to reach performance targets.

Corporate culture today celebrates wealth and fame, creating a push among employees for hefty payouts and greater recognition at any price. And since many businesses no longer are owner-managed, managers and directors at the helm are unlikely to bear ownership costs when mishaps occur.

These differences support the need to expand (emphasis added) on Cressey’s theory to a five-sided Fraud Pentagon, where an employee’s competence or power to perform and arrogance or lack of conscience are factored into the conditions generally present when fraud occurs.

Competence expands on Cressey’s element of opportunity to include an individual’s ability to override internal controls and to socially control the situation to his or her advantage, by selling it to others, coercing them, or bullying them into doing something improper, including not acting at all.  Competence can also be perceived competence – meaning the individual is a position within the organization and when something goes wrong they try to conceal it because they don’t want others to believe they are incompetent and telling the truth is not an option puts the individual at risk of being challenged and exposing their true knowledge and capabilities.  These individuals also try to surround themselves with those who can be controlled  – sometimes by overpaying them and putting the fear of losing their jobs over their heads.

Arrogance or lack of conscience is an attitude of superiority and entitlement or greed on the part of a person who believes that corporate policies and procedures simply do not personally apply.

This person, perhaps fueled by today’s obscene compensation structures, has complete disregard for the consequences bestowed upon his or her victims. Competence and arrogance play a significant role in determining whether an employee today has what it takes to perpetrate a fraud.

Unchecked, the five elements – pressure, opportunity, rationalization, competence, and arrogance – can provoke an individual to commit fraud. Adept individuals with widespread access to corporate information, a mindset of entitlement, and the confidence to pull it off compound the risk of fraud. Moreover, placing these individuals in a culturally lax environment with poor tone from the top and weak or poorly designed internal controls is a recipe for disaster. A company with such conditions could become the lead scandal in tomorrow’s news.

Each of these five drivers of fraud is present to some extent in companies at all times, but never more so than in the current pressure-filled corporate environment.

The Fraud Pentagon has been recognized as a fraud model and is being used in academia, in practice, and has been referenced many times.  My hope is that this new theory pushes the profession in the fight against fraud.

Screen Shot 2020-05-12 at 9.48.02 AM

Practice Pointer

Earlier I mentioned focusing on the crime(s) and not the perpetrator(s), or the “human element”.

While the Fraud Pentagon identifies the conditions under which fraud may occur, the Triangle of Fraud Action (See Below) describes the activities an individual must perform to perpetuate the fraud. Together they form the Advanced Meta-Model of Fraud.

Mainly, the Fraud Pentagon is “why based” and should be used in concert with the “what-based” Triangle of Fraud Action to better explain fraud cases and maximize your anti-fraud efforts – In essence analyzing the “human element” and the “crime” together, which historically has not been done by most.

Governance – Corporate Boards should be aware of the Pentagon’s five elements and make sure they are applying the proper oversight. Remember all acts of indiscretion can cause harm!

If you are reading this and have applied my theory, I would appreciate it if you could comment on my blog and site of your work or provide a brief summary of how it was used.

Thank you!

Jonathan T. Marks, CPA, CFE



Donald R. Cressey

This model was developed by me when I was a partner at Crowe LLP and served as the Firm Leader of the Fraud, Ethics, and Anti-corruption Product and Solutions Practice.  I sincerely thank my former partners for allowing me to pursue my passion.

Sam Antar, former CFO of Crazy Eddie

Showtime – Billions TV Series

Richard Riley – Evolution of Fraud Theory

Note: I had been using the competence and arrogance elements since 1995, but didn’t really formalize my thinking until 2002. Around that time, I vetted the concept with Courtney Thompson and other fraud and anti-fraud experts, who agreed with my enhancements.

Revised from 9/21/18.


Please follow and like us:

Articles You Might Like

Share This Article

Share on facebook
Share on twitter
Share on linkedin
Share on tumblr

More Stories

%d bloggers like this:
Skip to toolbar