Opening the Fraud Triangle… If this message remains, the browser or host is blocking the interactive script. Open the deployed site directly in a new tab.
INSIDE-OUT ECONOMICS / FRAUD CASE FILEMACHINERY · TRIANGLE
MACHINERY / INVESTIGATE THE SYSTEM
THE FRAUD TRIANGLE.
The bank earns £18m against a £20m target. Missing a target is not fraud. The manager knowingly proposes a misleading £20m report. Click each corner to investigate why.
CHOOSE A MECHANISM ↓
THE PROPOSED LIE
£2m
of expected loan losses the manager proposes to conceal
THE CASE / TWO VERSIONS OF THE SAME PROFIT
Profit before expected loan losses£24m
Evidence-supported expected loan losses− £6m
Evidence-supported profit£18m
Manager's proposed loss entry− £4m
Misleading headline, if accepted£20m
THE CRUCIAL DISTINCTIONBAD RESULTS ≠ FRAUD
The manager has read a documented £6m expected-loss estimate but deliberately proposes £4m without supporting evidence. That knowing misstatement, not the profit shortfall, is the alleged fraud.
01 / PRESSURE · PRINCIPAL–AGENT CONFLICT
WHEN DOES HONESTY COST £80,000?
Start with fixed salary. Then change only the pay contract. The bank still earns £18m, and the manager still knows the same loan losses.
THE PRINCIPAL AND THE AGENT / TWO POSSIBLE REPORTS
SHAREHOLDERS · PRINCIPAL
Want reliable profit and sound lending decisions.
⇄
MANAGER · AGENT
Prepares the accounts and sees the loan-risk evidence.
MANAGER'S REPORTPROFIT SHOWNEXTRA PAY
Tell the truthRecognise £6m losses£18m£0
Distort the figuresReport only £4m losses£20m£0
EXTRA PERSONAL REWARD FOR THE FALSE REPORT
£0
Fixed pay leaves no cash prize, although unequal information and career pressures remain.
STEP THROUGH THREE CONTRACTS
STARTING POINT / NO CASH WEDGE
FINANCIAL ECONOMICS · WHAT ACTUALLY CHANGED?
02 / OPPORTUNITY · INFORMATION ASYMMETRY
CAN THE BANK SEE THROUGH THE ACCOUNTS?
The risk team has evidence of £6m expected loan losses. The manager proposes £4m. Change who checks the loan files before the figures reach shareholders.
THE LOAN FILES / UNSUPPORTED REDUCTIONS
Construction borrower
£1.0m
NOT CHECKED
Retail borrower
£0.6m
NOT CHECKED
Transport borrower
£0.4m
NOT CHECKED
Unsupported loan-loss reduction remaining£2.0m
Profit that could reach investors£20.0m
Green = corrected misstatement · Pink = misleading amount still unchecked
Three fictional loan files account for the £2m discrepancy: £1m + £0.6m + £0.4m. A spot check deliberately inspects the largest one first.
CHOOSE HOW THE PROFIT FIGURE IS VERIFIED
THE ECONOMICS:
03 / RATIONALISATION · MOTIVATED REASONING
CAN YOU MAKE THE LIE SOUND RESPONSIBLE?
The evidence has not changed. Choose what the manager tells the board, then unseal the risk report to test the explanation against what they already knew.
WHAT THE BOARD HEARS
FINANCE MANAGER · DRAFT BOARD BRIEFING
RISK TEAM'S CONTEMPORANEOUS NOTESEALED
The risk team's signed assessment is hidden from the board. Unseal it to compare the narrative with the evidence.
PROFIT PRESENTED TO THE BOARD£20m
CHOOSE THE MANAGER'S EXPLANATION
THE ECONOMICS:
RECONSTRUCTION / FOLLOW THE MONEY AND THE INFORMATION
CAN YOU STOP THE £2 MILLION LIE?
Now reset to one risky case: £20m misleading draft, £80k target bonus, no safeguards. Switch protections on and off: which changes incentives, evidence or approval?
CHANGE THE BANK'S RULES · COMBINE SAFEGUARDS
TRY A CONTROL PACKAGE
The manager controls the draft. Without challenge, the false £20m headline is ready to be filed.
WHAT HAPPENS TO THE SAME £20m DRAFT?
REPORT TO APPROVE£20m
BONUS AT STAKE£80k
£2m DISCREPANCYHIDDEN
FOLLOW THE CONTROL CHAIN READY TO FILE
1
PAY CONTRACT£80k if £20m accepted
£
2
INDEPENDENT EVIDENCE£6m risk files not checked
?
3
BOARD CONTROLManager's draft goes unchallenged
!
4
FINAL OUTCOME£20m filed; bonus paid
→
THE RESULT
THE MODEL & WHAT IT DOES NOT CLAIM
Fictional case: £24m profit before expected credit losses, risk-supported losses of £6m and resulting profit of £18m. A manager, despite knowing the risk assessment, proposes recording only £4m, creating a £2m overstatement. The accounting treatment is assumed to be intentionally unsupported for the teaching case; estimates normally involve judgement under IFRS 9; ordinary disagreements about forecasts are not automatically fraud.
Pressure: fixed salary comes first: there is no additional cash payment for either report. A threshold bonus creates an £80,000 private reward from a manipulated reported figure, despite no additional real profit. Deferred, independently verified remuneration removes the reward for this unsupported headline. The information gap, job security and other motives may still exist; this is a contract demonstration, not a model of a banker’s probability of fraud.
Opportunity: three invented discrepancies of £1.0m, £0.6m and £0.4m. A spot audit checks the largest; independent verification checks all. They produce different corrected amounts by construction, not by modelling real audit accuracy or detection rates.
Rationalisation: narrative changes the attempted explanation, not the underlying borrower losses. The risk report contains information the manager is assumed to have seen. Protected escalation means the board must pause approval and initiate review when the risk team raises contrary evidence; escalation alone does not establish the correct estimate.
Final test: the £20m draft already exists. Safeguards are applied before approval. Removing the bonus stops the private payout but cannot repair a draft. Independent review verifies £6m expected losses and corrects the reported number to £18m. Protected escalation pauses publication and holds the bonus until the evidence is checked; a challenge is not itself proof of the correct number. These are defined process outcomes, not estimated fraud probabilities.