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Albrecht: Fraud Examination, 4e
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Chapter 2
WHY PEOPLE COMMIT FRAUD
Discussion Questions
- Research shows that anyone can commit fraud. Fraud perpetrators usually cannot be
distinguished from other people on the basis of demographic or psychological characteristics. Most fraud perpetrators have profiles that look like those of honest people. In other words, the types of people who commit fraud are ordinary people, just like you and me.
- People can be motivated to commit fraud because of financial pressures, vices, or
because of work-related pressures. As well, perpetrators of fraud can be motivated by a perceived opportunity to commit fraud and the ability to rationalize that what they are doing is not wrong. Their motivations are usually combined into the fraud triangle of perceived pressure, perceived opportunity, and rationalization.
- The fraud triangle includes three elements that almost always must be present in order
for someone to commit fraud: a perceived pressure, a perceived opportunity, and
some way to rationalize the fraud as acceptable. The fraud triangle is important because it helps us to determine the motives, reasons, and opportunities that someone had in committing fraud. By using the fraud triangle, we can better focus on areas in an organization that will help us detect and prevent fraud.
- The fraud scale illustrates the relationship between the three elements of the fraud
triangle. It shows that perceived pressure, perceived opportunity, and rationalization are interactive. In other words, the greater the perceived opportunity or the more intense the perceived pressure, the less rationalization it takes to motivate someone to commit fraud. Likewise, the more dishonest a perpetrator is, the less opportunity and/or pressure it takes to motivate fraud.
- Many types of pressures motivate someone to commit fraud. They include financial
pressures, vices, work-related pressures, and other types of pressures. Financial pressures include greed, living beyond one’s means, high bills or personal debt, poor credit, personal financial losses, and unexpected financial needs. Vices include addictions, such as gambling, drugs, alcohol, and extramarital relationships. Work- related pressures include feeling overworked or underpaid.
- The controls that prevent and/or detect fraudulent behavior have to do with providing
deterrence to those who are thinking about committing fraud. Having an effective control structure is probably the single most important step that organizations can take to prevent and even to detect fraud. There are five components in a company’s Fraud Examination 5th Edition Albrecht Solutions Manual Visit TestBankDeal.com to get complete for all chapters
Albrecht: Fraud Examination, 4e
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control structure: the control environment, risk assessment, information and
communication, control procedures or activities, and monitoring.
- Many factors provide opportunities for fraud including the inability to judge the
quality of performance; failure to discipline fraud perpetrators; lack of access to information; ignorance, apathy, and incapacity; and lack of an audit trail.
- Nearly every fraud involves the element of rationalization. Most perpetrators are first-
time offenders who would not commit other types of crimes. Rationalizing helps minimize the perceived dishonesty of their acts. Common rationalizations include:
The organization owes me. I am only borrowing the money—I will pay it back. Nobody will get hurt. I deserve more. It’s for a good purpose. We’ll fix the books as soon as we get over this financial difficulty. Something has to be sacrificed.
When interviewed, most fraud perpetrators say things like, “I intended to pay the money back. I really did.” They are sincere. In their minds, they rationalize that they will repay the money, and since they judge themselves by their intentions and not by their actions, they do not see themselves as criminals.
- Jim Bakker rationalized his actions by convincing himself that the PTL network had a
good purpose and that he was helping others. Bakker believed that any money he received would directly or indirectly benefit his followers. He had numerous pressures, including greed, selfishness, and a lust for power, and Bakker was in a position of trust. As with most people in positions of trust, he had numerous opportunities to commit fraud.
- Dr. Sam Waksal committed fraud by transferring shares into his daughter’s trading
account and then having her trade in his company’s stock (insider trading). Because he had insider information, he understood that it would be unethical for him to make trades. However, he rationalized that if he had his daughter make the trades, rather than himself, then his actions would be legal and ethical.
Later on, when explaining his actions, Waksal said the following: “I could sit there and think that I was the most honest CEO that ever lived. And, at the same time, I could glibly do something and rationalize it because I cut a corner, because I didn’t think I was going to get caught. And who cared? Look at me. I’m doing “X,” so what difference does it make that I do a couple of things that aren’t exactly kosher?”
Waksal’s rationalization allowed him to have a long history of ethical lapses, reckless behavior, and embellishing the truth. He had been dismissed from a number of academic and research positions for questionable conduct, for example. One former
Albrecht: Fraud Examination, 4e
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- Power is defined as the ability to influence someone else. When a fraud takes place,
the conspirator has the desire to carry out his or her own will—influence another person to act and do as the perpetrator wishes—regardless of resistance.
- Fraud perpetrators use power to influence and persuade individuals to participate in
fraud. Fraud perpetrators can get potential co-conspirators to join the fraud by promising a reward or benefit (reward power), by following the orders of a person who is in a position of authority (legitimate power), by making the potential recruit feel fear for not joining the fraud scheme (coercive power), or through deceiving someone because the potential recruit has a lack of knowledge (expert power).Finally, perpetrators can get potential perpetrators to join the scheme through the influence of a relationship (referent power).
True/False
- True
- True
- False. Management’s example is a very important part of the control environment.
- False. Good controls usually decrease opportunities for individuals to commit fraud
within an organization.
- False. Effective fraud-fighters put their efforts into trying to eliminate all three parts
of the fraud triangle, especially reducing opportunities.
- True
- True
- False. Fraud perpetrators who are prosecuted, incarcerated, or severally punished
usually do not commit fraud again. In fact, they have a very low rate of recidivism, while perpetrators who aren’t prosecuted have a high rate of recidivism.
- True
- False. Appropriate hiring will decrease an organization’s risk of fraud because people
with high integrity are less likely to rationalize and commit fraud.
1 CBSNews.com, “Sam Waksal: I Was Arrogant,” 6 October 2003,
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- False. An individual who owns his or her own business and is the sole employee
probably does not need many control procedures. While such people may have ample opportunity to defraud their companies, they have no incentive to do so.
- True
- False. Documents rarely serve as preventive controls, but they provide excellent
detective controls.
- True
- False. Power is almost always used to influence another person to participate in an
already existing fraud scheme.
Multiple Choice
- b
- d
- c
- a
- d
- d
- c
- e
- b
- a
- b
- c
- c
- b
- b
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