Why do people commit fraud?

 There are two answers to this question: short and long. Let us start with a short answer. There are two models. Model 1 ascribes fraud to opportunities, pressure, and rationalization. This is called the Fraud Triangle. Model 2 ascribes fraud to four factors: opportunities, pressure, rationalization, and capabilities. This is called the Fraud Diamond.

Pressure

When an employee has loved ones who need medical treatment, but he is drowned in debt and finds no refuge in society or the employer who could extend to him an interest-free loan or any support, he might resort to misappropriation of the employer’s assets; larceny, or cash skimming if he has access to the cash register. Or, if all his loved ones are fine and in good health but cannot meet their basic needs because the loans are eating up his only source of income, he might accept bribes or kickbacks. This is a pressure derived from economic factors and called Economic Pressure.

Some people wish to live in the same status as their friends and family. They want to live, travel, drive, wear, and educate their kids on par with those they emulate, even if all are beyond their means. This is a need that arises from Social Pressure.

An honest employee has no intention to perpetrate fraud, but his boss puts unreasonably high KPIs on him to achieve, such as the number of credit cards he has to sell, the number and amount of loans he has to market, etc. Amidst that, if time closes in, the cloud of scolding, reprimand, and bonus /increment reduction are all looming. If he sees the products’ shenanigans and manipulation of the books rescue him from that, he might succumb to that pressure. This is referred to as “Corporate Politics Pressure.”

Some employees may not need money per se, and they are not subject to the above pressures, but they need you as an employer to pay back; I call this the need for revenge, to make you pay back; they want you to suffer; they want to inflict pain for the pain, actual or imaginative, they think they endured during their tenure in your organization. This is a tricky need because, derived from this motive, they might not necessarily seek financial rewards for their fraudulent conduct. They hope to tarnish your reputation and commit negligence to lead to the payment of fines, compensations to vendors, etc.

Opportunity

There are two facets of opportunity: the opportunity to rationalize (which will be discussed afterward) and the opportunity to conduct fraudulent conduct.

Assume we have a highly motivated employee by the various pressures to take cash from the register or accept a bribe. How would they do that in an environment of strong control and governance?

No matter how air-tight your governance and internal control environment is, you can never eliminate the risk of people committing fraud. Thus, there will always be an opportunity, and there will always be pressure on any employee.

No organization can eliminate pressure or opportunities, whether regulated by one body or dozens. This is because pressure and opportunities are related to people, their thinking, psychology, and actions. Do not be illuded to believe that anything can predict that.

Take, for instance, the traditional type of fraud: bribery. Bribery, which involves your staff colluding with vendors or customers, cannot be predicted or controlled by a policy, procedure, or internal control checklist.

Does that mean organizations should give up and take no action to hedge that risk? Not at all.

Organizations can do a lot. Albeit they cannot eliminate fraud risk, they can still make it complicated, costly, and time-consuming to carry out. They can also deter fraud by setting up penalties and a punishment system for fraudsters. The aim is for fraudsters to balance the benefits of the fraudulent activities with the punishment they must endure.