There are many varying definitions of fraud, all relative to different factors. For the purpose of this article series, however, the manner in which fraud is viewed will be based on the Association of Certified Fraud Examiners (ACFE) definition, which is:
… any activity that relies on deception in order to achieve a gain. Fraud becomes a crime when it is a “knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment” (ACFE, Fraud 101).
Much of today’s understanding of fraud, its perpetrators, and the explanations behind it come from a criminologist named Donald Cressey, who developed his theory of the fraud triangle in 1950. Cressey refers to the perpetrators of fraud as “trust violators”, because in the majority of cases, a fraudster is someone who has gained a position of trust in an organisation, and has decided to misuse that trust for his or her personal benefit. The ACFE has determined that organisations lose approximately 5% of its revenue every year to fraud, and that the problem is only increasing. It is therefore an important exercise to explore the reasons behind why fraud is committed, so that there is a chance to mitigate the risk factors.
The fraud triangle model that many fraud examiners and criminologists still use today is comprised of the following three elements:
- Motivation/pressure – before an offender has even considered committing fraud, there has to be a problem that he or she experiences. The problem is often of such severity that the offender deems it ‘non-shareable’, and thus may believe that it requires a unique, and sometimes drastic, method of resolution. The motivation or pressure is the push in the wrong direction; the stimulus.
- Opportunity – much like any other crime, fraud can only be committed if the perpetrator has the chance to do so. This step of the process is generally where, as previously mentioned, the offender will use his or her position of trust in the organisation.
- Rationalisation – a good analogy for rationalisation is that it is like the oxygen that keeps a fire burning. Motivation and opportunity will set the fire, but an offender will not go through with the fraudulent act if there is no conviction.
All of the above elements work concurrently with each another, and Cressey asserts that it takes all three for “trust violation” to occur.
Part 2 of this article series will analyse the various motivations and pressures experienced by fraudsters.
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