What is fraud and why does it happen?

What is fraud and why does it happen?

Simply stated, fraud happens when there is an accumulation of money, or at least a steady flow of cash or the equivalent, and a (formerly trustworthy) trusted party, managing that money, who decides to appropriate some cash for his or her own use. We call that type of theft, embezzlement. Most fraud is some form of “asset misappropriation”, the term used in the fraud examiner’s world.

Fraud is not a simple robbery, where force or a weapon is used to coerce someone to turn over valuable property of which the possessor rightfully controls. Instead of being trustworthy, the embezzler tricks the rightful owner of the property into thinking that the cash flow or the accumulated amount is still unimpeded and/or is not being diverted. That trickery is used to hide growing stolen goods, accumulating in value over time.

Who is guilty of this dastardly deed? According to the worldwide Association of Certified Fraud Examiners (ACFE) http://www.acfe.com/, around 85% of fraudsters are what is called in the parlance, an “accidental” fraudster. Those who defraud, intentionally participated in and perpetrated the fraud. That is part of the trickery. But “accidental”, is used as a modifier meaning that although the fraudster intentionally took the money, they did not begin the job intending to become an embezzler. It just worked out that way.

How does an accidental fraudster come to be? Well, in 1973 a sociologist named Donald R. Cressey, in a book called “Other People’s Money”, put forth a theory that explains about 85% of fraudulent behavior on the part of an accidental fraudster. Cressey’s theory is known as the Fraud Triangle. The three sides of this triangle are 1) Perceived unshareable financial pressure, 2) Perceived opportunity, and 3) Rationalization. Through a combination of financial pressure like an unknown expensive surgery for a loved one or a drug habit, or gambling debts, etc., ad infinitum, plus rationalization, then if given the right opportunity, most of us could become an accidental fraudster.

We generally do not know our employees well enough to know exactly what unshareable financial pressure they are facing. And unfortunately, we humans tend to rationalize on a regular basis. Therefore, the only real way to prevent fraudulent activity taking place is to prevent the opportunity from occurring. How might this be accomplished? Stay tuned for my next blurb


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