1. Chapter 2: Why People Commit Fraud
Fraud Examination, 4E
Chapter 2: Why People Commit Fraud
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2. Learning Objectives Know the types of people who commit fraud.
Explain why people commit fraud.
Describe the fraud triangle.
Explain the fraud scale.
Understand how pressure contributes to fraud.
Understand why opportunity must be present for fraud to occur.
Understand why people rationalize.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3. Learning Objectives
Understand how people are recruited to participate in fraud schemes.
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4. Type of People That Commit Fraud
What type of people commit fraud?
Anyone!
Not demographically or psychologically differentiated
Have the profile of other honest people
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5. Reasons to Commit Fraud
A combination of the following (Fraud Triangle):
Pressure
Opportunity
Rationalization
Immediate financial need
The fraud gets larger and larger as confidence in the fraud gets higher and higher
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6. The Fraud Triangle
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7. The Fire Triangle
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8. The Fraud Scale
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9. Pressure Divided into four main groups:
Financial pressures
Vices
Work-related pressures
Other pressures
Approximately 95 percent of all frauds involve either financial or vice-related pressures
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10. Pressure Common Financial Pressures: Greed Living beyond one’s means
High bills or personal debt
Poor credit
Personal financial losses
Unexpected financial needs
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11. Pressure Vice Pressures Worse kind of pressures to commit fraud
Examples include:
Gambling
Drugs
Alcohol
Expensive extramarital relationships
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12. Pressure Vice Pressures Real-life examples:
Dad that embezzled his six-year-old son’s allowance
Women who stole money to fund her children's drug addiction
Man that used company money to fund his drug addiction
The parents who took their newborn baby from the hospital with heroin under its tongue
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

13. Pressure Work-Related Pressures “Get even with the employer”
Motivated by these factors:
Getting little recognition
Feeling job dissatisfaction
Fear of losing one’s job
Being overlooked for a promotion
Feeling underpaid
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

14. Pressure Work-Related Pressures Real-life example:
The worker that worked hour days, received a promotion, and accepted kickbacks to compensate for her “overworking.”
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

15. Pressure Other Pressures Spouse Pressures Life Pressures
Spouse’s lifestyle demands
Life Pressures
Family crisis
Social Pressures
“Being successful”
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16. Opportunity Six major factors that increase opportunity:
Lack of controls
Inability to judge performance quality
Failure to discipline fraudsters
Lack of access to information
Ignorance, apathy and incapacity
Lack of audit trail
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17. Controls to Prevent/ Detect Fraud
Internal Control Framework
From Committee of Sponsoring Organizations (COSO)
Control Environment
The Accounting System
Control Activities
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18. Controls to Prevent/ Detect Fraud
Control Environment
Management’s Role and Example
Management Communication
Appropriate Hiring
Clear Organizational Structure
Effective Internal Audit Department
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

19. Controls to Prevent/ Detect Fraud
Accounting System
Transactions are…
Valid
Properly authorized
Complete
Properly classified
Reported in the proper period
Properly valued
Summarized correctly
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20. Controls to Prevent/ Detect Fraud
Control Activities or Procedures:
Segregation of duties, or dual custody
System of authorizations
Independent checks
Physical safeguards
Documents and records
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

21. Rationalization Third element of Fraud triangle.
Common rationalizations by perpetrators
I deserve more
I am only borrowing the money and will pay it back
Nobody will get hurt
It’s for a good purpose
I pay more than my fair share of taxes
The government wastes money
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

22. Recruitment of Fraudsters
Many frauds are committed by more than one person
The majority of frauds—especially financial statement frauds—are collusive
CFO survey results:
67 percent received requests to misrepresent corporate results
55 percent fought off the requests
12 percent yielded
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23. Recruitment of Fraudsters
Types of Power
Reward Power
A’s ability to provide benefits to B
Coercive Power
A’s ability to punish B if B does not comply with A
Expert Power
A’s possession of special knowledge or expertise
Legitimate Power
A’s legitimate right to prescribe behavior for B
Referent Power
The extent to which B identifies with A
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

24. Recruitment of Fraudsters
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

25. Recruitment of Fraudsters
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.