Why Do People Commit Fraud?

Fraud is a deceitful action conducted by many individuals in the business sector for selfish purposes. We should question why fraud takes place. If an organisation wants to protect the integrity of the business against unethical conduct, then they should analyse the potential reasons for fraudulent activity.

Why Do People Commit Fraud?

Compliance Knowledge Base | Fraud Awareness Training

Posted by: Morgan Rennie Published: Tue, 11 Sep 2018 Last Reviewed: Tue, 11 Sep 2018
Why Do People Commit Fraud?

Fraud is the deliberate act of deceit, with the objective to achieve a beneficial outcome for the perpetrator. Therefore, it has to be questioned why an individual would engage in such unethical behaviour. There are many different types of fraud, but the reasoning behind an individual's motivations to conduct fraud can be applied to many cases. If an organisation wants to prevent fraud from occurring within the organisation, they need to consider why individuals are conducting fraud. Knowledge and training about the motivations behind fraud is essential.

The Fraud Triangle Theory

Donald Cressey, an American criminologist, established the theory of a Fraud Triangle. This theory suggests that there are three specific factors which encourage an individual to commit fraud. These are:

1) Pressure.

This theory states that pressure needs to be apparent to encourage an individual to commit fraud. Pressure can originate from many different outlets, such as pressure to pay bills or to uphold an addiction.

2) Opportunity.

An opportunity needs to arise in order for fraud to be committed. These opportunities are usually low-risk and make it easier for an individual to commit fraud because they are aware it is unlikely they will be caught. If an organisation does not implement a robust anti-fraud policy, then opportunities for fraudulent crimes will arise more often.

3) Rationalisation.

An individual who is ready to commit a fraudulent act will justify why they are doing this act, and therefore they will assume that they are conducting fraud with a rational mindset. If fraud occurs within an organisation then it can be a financial burden, so organisations should try as hard as possible to identify and prevent fraud from taking place. To do this, organisations can use the fraud triangle theory to identify when a possible fraudulent action could occur.

Why Do People Commit Fraud?

What are other reasons why individuals commit fraud?

Dr. Muel Kaptein, a professor in business ethics and integrity at the Rotterdam School of Management, published some work which analyses why individuals commit fraud. Kaptein's work states that it is not just immoral individuals who commit fraud; it has been proven that hard-working everyday individuals commit fraud as well. Kaptein's conclusions, similar to the Fraud Triangle Theory, establish that individuals commit fraud when they are under extensive pressure and assume that they can get away with it:

1) If an organisation advocates unethical business practices, such as bribery, then employees and the associated persons of an organisation will not consider there to be anything wrong with fraud.

2) If the organisation that an individual is a part of is very large, then it is easy for that individual to fade into the background and assume that a small fraudulent act will go unnoticed.

3) Individuals may want to gage how far they can push the limits of their organisation by seeing how many fraudulent acts they will be able to conduct before the organisation finds out.

4) People can become selfish in the business sector because of the presence of large amounts of money, as it can make someone want to earn the most money in the organisation, even going as far as committing fraud to achieve this. In July 2018 the ACFE held a fraud risk management seminar after realising that on average businesses lost 5% of their annual revenue due to fraud. Therefore, it is considered of the utmost importance to finalise and implement fraud risk management.

Association of Certified Fraud Examiners (ACFE)

It is essential for an organisation to be aware of when fraud has taken place within their organisation, in order to avoid the severe penalties which could occur. The Association of Certified Fraud Examiners (ACFE) is an organisation of fraud examiners. They have been established with the purpose of producing information on how to identify fraud, as well as offering training on how to avoid fraud.

Organisations have the responsibility to maintain an ethical business environment and the integrity of the workplace. They should commit to identifying why and how potential fraudulent activity could occur.

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