Sunday, July 5, 2009

Understand why people commit fraud

To be able to be in a position to understand how fraud is committed, reduce the likelihood of it happening and if it does, investigate it thoroughly, we must first understand why people commit fraud.

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;
  • Greed;
  • 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.

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