There are four components to why a person commits fraud, as follows:
Pressure on the person is the reason people make the decision to commit fraud. Pressure includes:
- Living beyond ones means;
- Poor credit;
- Personal financial loss;
- Unexpected financial needs.
Rationalisation is how a person who commits the fraud believes what they are doing is reasonable. It must be remembered that rationalisation is in the mind of the person committing the fraud, not what a reasonable person would consider to be rational. Some of the ways a person committing fraud rationalises what they are doing are as follows:
- “It’s only a loan. I’ll pay it back as soon as I can."
- “They didn’t give me the pay rise I deserve.”
- “Nobody will get hurt. It’s only a company not a person.”
Opportunity is what within the organisation allows the person to commit fraud including a lack of controls, poor culture within the organisation or failure of management to handle fraud appropriately. Consider opportunity as follows:
A perceived opportunity
Ability to conceal the fraud
Avoidance of it being discovered
Avoidance of it being punished
Capability means that a person is able to commit the fraud, for example:
- The person’s position in the organisation provides them with the ability to exploit an opportunity to commit fraud that may not be available to others;
- The person is smart enough to understand and exploit weaknesses in internal controls and be able to use their position and access to exploit the weakness;
- The person has a strong ego and confidence that he/she will not be detected or he/she believes he/she could talk himself/herself out of trouble if caught – a person’s arrogance;
- He/she can coerce others to commit or conceal fraud – he/she has a persuasive personality;
- He/she lies effectively and consistently – he/she must be able to look management, auditors, investors, bankers and others in the eye and lie convincingly;
- He/she deals very well with stress – committing and managing the fraud over time can be very stressful.