Why Fraudsters Do What They Do

By Lowers & Associates,

Most managers and owners eventually discover a case of fraud and abuse in their organization. The fraudster is often a trusted, long-time employee or manager who had or created access to some of the organization’s assets, and helped him or herself to it.

Why does this happen?

The answer is not simply greed, but most, maybe even all, people want things and want more things. There are studies that show an amazingly high proportion of employees or managers have taken small things from their organization. However, there is a line between this petty theft and intentional fraud that a few people cross over.

The Fraud Triangle: A Model for Understanding Fraud

The fraud triangle, created by criminologist Donald Cressey, lays out the three factors that make up a true case of fraud. Like all crime, fraud requires both motive (called “pressure” in most discussions of the fraud triangle) and opportunity. Cressey named two of the legs of his triangle after these, but added a third element—rationalization—that is needed to account for the fact that occupational frauds can go on for a very long time before being discovered. The rationalization allows the fraudster to dull the pain of remorse and carry on as if nothing were wrong.

It’s difficult to explain the incidence of fraud by opportunity. Of course, the crime cannot occur without opportunity, but the same circumstances are available to other people in the organization who do not yield to the temptation. Even the fraudster may be exposed to the opportunity for many years before stepping across the line.

The key to the fraud is pressure. There are as many sources of pressure as there are fraudsters, but the most typical one is financial. Fraudsters may suddenly need money they cannot get quickly enough by saving, perhaps for a debt or loss, or to compensate for a bad investment. Of course, greed plays a role when a desirable lifestyle cannot be supported by income. Some fraudsters may simply feel entitled by a real or perceived slight, by being passed over for a promotion, or other personal affront.

If the pressure is the motivation, then rationalization allows the fraudster to continue to live as a thief. The purpose of rationalization is to justify bad behavior, so it will frame the behavior as a righteous act. For instance, the fraud may be seen as a response of a mistreated small person against a cold, uncaring corporation. Whatever the specifics, think of the fraudster as believing that their gains are just deserts.

Most financial and organizational controls like segregation of duties are aimed at known opportunities. These are generally well known, documented, and taught. However, occupational fraud is almost always done by an insider who knows the controls very well. So, the motivational component is key, and neither internal controls nor external audits are designed to assess motivation.

How well do you know your employees?

How Can You Cut Your Organization’s Risk of Fraud by 50%?

By Mark Lowers,

compliance training

You’ve seen the data before: Organizational fraud is a huge annual cost. Managers want to reduce the costs, so the real questions are to learn why fraud occurs and what to do about it.

The most compelling explanation for organizational fraud is the Fraud Triangle, as summarized in our recent infographic. Frauds occur when there is opportunity, one or more employees are under perceived financial pressure (incentives exist), and they can rationalize their fraudulent behavior. These 3 factors correspond to the legs of the triangle.

Control the Opportunities to Reduce the Chances of Fraud

In our experience, organizations can reduce the probability of organizational fraud by just removing one of those legs of the triangle. There are things you can’t control, such as employees’ spending habits, but if you remove the opportunity for employees to get their hands on an asset without the potential of getting caught, then you’ve reduced that probability by 50 percent. … Continue reading

  Category: Risk Management
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