Reasons people commit fraud
WHY PEOPLE
COMMIT FRAUD
BY
CHUKWUEKWU NORDI OKONTA
(CNA,CrFA,MBA,FAFE–wvu USA)
WHY PEOPLE COMMIT FRAUD
INTRODUCTION
At end of the lecture you will understand the meaning of the following;
- The definition of fraud
- Why people commit fraud
- Fraud cases in Nigeria
- The three elements of fraud
- The Fraud Triangle
- How to prevent fraud
- Know few cases of fraud
Why People Commit Fraud
Dictionary Definition of Fraud
An act of using deceit such as intentional distortion of the truth of misrepresentation or concealment of a material fact or gain an unfair advantage over another in order to secure something of value or deprive of a right.
In simple term fraud is the art of deception for gain. Dishonesty is an essential ingredient. Fraud varies in type, size and complexity. It changes as society changes, with all its different attitudes and technological advancement.
To better understand why people commit fraud, consider the fraud triangle. A model developed by Donald Cressy, a Sociologist and Criminologist that studied the behavior of white colour criminals. He examined the reason why people are engaging in fraudulent activities in 1950 after interviewing 250 criminals within five months. The Fraud Triangle is based on the premise that for an ordinary individual to commit fraud, three components must exist. There must be a perceived pressure, a perceived opportunity, and a rationalization.
Let’s spend a few minutes looking at each of these components,
The first leg of the triangle represents pressure. This Pressure does not need to actually exist. A perceived pressure is real to the individual committing fraud.
A potential fraudster must feel that the pressure is non-sharable, that it must be dealt with alone. The individual usually believes that the problem is impossible to resolve legally. And if the problem continues, the ultimate result will be financial collapse. Frequently, the current issue is related to a personal or external problem such as excessive debt or loss of employment.
Many of the problems originate with vices such as drugs or alcohol abuse, gambling, extramarital affairs or living beyond ones means. Perceived pressures are challenges for the forensic auditors to deal with. Because the auditors have limited contact with the individuals, and therefore have no baseline for the symptoms of the problem for which the fraudster is dealing. The second leg of the fraud triangle related to opportunity. Before an individual commit fraud, there must be the perception of an opportunity to take advantage of the system without being caught. Allowing removing the pressure in secret. The Primary source of opportunity relates to poor or inadequate internal controls within the organizations financial system. Basically, internal controls only allow an individual to access the specific task required for that individual’s job. Separation of duties is a set of controls that split accounting functions among various people to prevent problems. Collusion exists when two or more people cooperate or collude to get access to each other’s parts of the system. Combined they have the opportunity to commit fraud, where individually neither had that opportunity. For example, when someone that has the authority to order an item, but not approve payment of the item, teams up with or colludes with an individual that has the authority to approve payment. But not to order the items, together through collusion, they can order and pay for items that are not related to the organization’s mission. You can see why collusion is difficult to detect, everyone is doing their individual job.
Another difficult issue to address is management’s opportunity to override internal controls. Management with full authority within the system can override or ignore controls that are in place. This is a difficult issue because employees that see what’s going on may not have a framework to report the problem other than to their manager. And we know that if the manager is the problem, that reporting will not happen. Other items that relate to the fraudster’s perception to opportunity include poor or inadequate training. Which often leads to the defense, I did not know any better.
Another is lack of supervision. People are less likely to identify a situation as an opportunity if they are adequately supervised. Unfortunately, opportunities are identified and taken advantage of when organizations do not prosecute fraudsters or have otherwise weak ethical cultures
If the tone of the organization is to look the other way when a problem occurs someone with a perceived pressure will likely find opportunities to commit fraud. The last leg of the fraud triangle is rationalization. People are generally honest, fraud involves theft. To prevent fraudsters from perceiving themselves as criminals, there is rationalization.
Rationalization helps justify the crime in a way that makes it acceptable in the mind of a fraudster. One of the most common rationalizations is, I deserved it, or they owe it to me.
Employees that believe that they are under paid or otherwise financially taken advantage of, frequently use this form of rationalization. They treat me bad, is a non-financial variation. I deserve it , Another rationalization is I’m just borrowing the money; mainly it’s much easier to justify borrowing than stealing.
The problem is that the pressure to take the money is usually not gone when repayment needs to be made so the borrower never repays the debts.
Another problem with this excuse is that when one borrows it’s only reasonable for the lender to know about the transaction.
The finally, rationalization where they mentioned , it’s not my fault, which is used to transfer blame to someone else. This can be used in many circumstances, those prevalent when the individual has access to something that should be protected. For example, a computer is found logged on in the company’s pay maintenance screen. The rationalization is not my fault; someone left the computer unattended, enabling me to change my pay rate.
The fundamental premise of the fraud triangle suggests that when an ordinary person or accidental fraudster commits fraud, all three of the legs of the triangle must be present. There must be 1. perceived problem that cannot be shared.
Additionally, there must be an 2.opportunity available that the fraudster believes can be used to solve the problem. And finally, the person will 3. rationalize the fraud, to help in the denial that the action is wrong.
Understanding the fraud triangle helps us understand the person behind the fraud as well as helping us in the detection of the fraud. Now that you understand the fraud triangle, it may be obvious to you that the easiest leg to address is opportunity.
Case1
EFCC arraigns Ex-XYZ bony cooperative chief and four others for N207 million frauds on a 12- count charges bordering on forgery, force pretense. President and secretary offence, purchase of land for members @N1.22b in excess of actual price of N830m contrary to section (1) of advance fee fraud and other related offences of 2006 and punishable under section 1 (3) of same act
Case2
- Company: Enron Huston based commodities, energy service cooperation
- What happens: Share Holder lost $74b
- Men Players: C.E.O
- How they did it: Kept huge debt off balance sheet
- How they got cut: Turned in by internal Whistleblower
Penalties: the author Anderson (External auditor) found guilty of forgoing enron’s account