Fraud is a crime that can have a debilitating effect on its victims, with devastating consequences for the individuals and businesses targeted. It requires premeditation and a commitment to disregard the harm it causes.
More than half (52%) of large companies experienced internal fraud in 2020 and 2021, according to PwC’s Global Economic Crime and Fraud Survey 2022. That is the highest level in 20 years of survey research. About one in five of those companies (18%) reported that their most disruptive incident of fraud cost them more than $50 million.
Given the scale of the fraud problem, it’s necessary to understand not just the how, but also the why. This is where the fraud triangle, a framework developed by criminologists, becomes relevant. It is referred to in auditing, and states that when three specific conditions are present, the likelihood of an individual’s committing an act of fraud increases. Those conditions are:
- A perceived need, pressure, incentive, or motivation;
- A perceived opportunity; and
- A rationalisation as to why fraud is acceptable in the circumstances
Perceived need or motivation
Individuals can find their personal circumstances upended for any number of reasons. They may struggle with poorly set corporate objectives — such as what happened at US financial services company Wells Fargo and German automaker Volkswagen. Pressures such as the rising cost of living or increased expenses associated with taking care of a sick relative can also create an overwhelming financial need.
Others may be motivated by, for example, the frustration of feeling as though they are earning less than they should be or less than others in their social circle. Addiction, such as a gambling addiction, can also be a motivator to commit fraud. Then there are those who are pressured by others to be complicit in fraudulent behaviour, or to look the other way when it occurs.
Whatever the circumstances, individuals in these situations often feel unable to disclose their troubles. They may fear the consequences of sharing personal circumstances or have concerns associated with social stigmas. In any case, this pressure, perceived or otherwise, can build until a person has lost the ability to think of other solutions.
None of this is an excuse for fraudulent behaviour. Perpetrators may justify their actions by convincing themselves that it is a victimless crime, but we should not lose sight of the fact that the consequences of fraud can be devastating. We can, however, still recognise that the types of pressure that drive some individuals to commit fraud are common and can, under certain circumstances, affect almost anyone.
For individuals feeling such pressures, seeking support at the earliest opportunity is advisable, whether that be professional advice or support from trusted loved ones. Catching problems early prevents them from escalating to the point where it feels as though an illegal solution is the only choice.
For employers, addressing this risk is difficult. Having a broad range of good value benefits can provide practical solutions and comfort to employees in difficult times. Such benefits can also make a company an employer of choice in a competitive landscape where the best employees are looking for the best salary and benefits package available.
Perceived opportunity
When the pressure builds, there can come a point when those feeling its effects become desperate enough to act. Then there need only be the sight of an opportunity to alleviate the pressure.
Maybe the process for approving overtime is lax. Maybe the petty cash is loosely monitored. It could be that invoices are approved without much scrutiny or oversight. Whatever the case, at this point, with the pressure inescapable, the seed of misconduct has been sown.
It’s important to understand that this perceived opportunity takes hold partly because of the temptation that a fraudulent act can solve the individual’s problems without anyone finding out they were in a place of difficulty in the first place.
Clearly, it is crucial for organisations to protect themselves against fraud. Just as there are myriad ways to fall victim to fraud, there are numerous ways to guard against it. Internal control processes that are straightforward to implement and provide the necessary level of oversight can prevent individuals from even taking a chance. However, it is not enough to put these processes in place; they must be enforced and monitored. It is also important to ensure that there are procedures in place to address a breach of controls. An unenforced policy is of little use.
Although effective controls against fraud are necessary, a unified company culture with clear values is one of the best deterrents. Although discussions of intangibles such as culture or values can sometimes leave people underwhelmed, what we are really discussing is behaviours.
These refer to acceptable norms that are promoted and unacceptable conduct that is not tolerated. An ethical culture needs well-defined behaviours that make clear acceptable and unacceptable acts. For example, organisations can model the desired behaviours they wish to foster, with senior leadership visibly embodying the standards expected. Awards and rewards should recognise desired behaviours, and businesses should invest in skills training and resources to help staff develop ethical problem-solving skills.
Rationalisation
Many people who commit fraud know it is wrong, which is why they often convince themselves that they, or their personal circumstances, are an exception. Further, a belief that they can evade detection emboldens many to act.
The absence of a rationalisation for fraudulent behaviour is one of the last safeguards against fraudulent activity. Once a person’s difficulties become too heavy a burden to bear, and an opportunity to alleviate that burden arises, what remains is the question, “Why shouldn’t I?”
An employee taking money from petty cash may tell themselves they are only borrowing it and will replace it later. Maybe an employee alters reported earnings, hoping that future income will increase to cover for underperformance and the employee can re-adjust the figures by year-end.
Requirement 111.2(a) of the CIMA Code of Ethics (sec.111, “Integrity”) states that a professional accountant shall not knowingly be associated with reports, returns, communications, or other information where the accountant believes that the information in question contains “a materially false or misleading statement”. Paragraph .05 of the “Knowing Misrepresentations in the Preparation and Presentation of Information” interpretation (ET sec. 2.130.010) of the AICPA Code of Professional Conduct under the “Integrity and Objectivity Rule” (ET sec. 2.100.001) states that if a member in business “makes, or permits or directs another to make materially false and misleading entries in an entity’s financial statements or records”, then the member will be considered to have knowingly misrepresented facts in violation of the “Integrity and Objectivity Rule”. Clients, employers, regulators, investors, those charged with governance (eg, the board of directors), and lenders or other creditors must be able to trust that reporting is accurate and that an accounting professional can be trusted to provide reliable information. That is why the AICPA and CIMA codes are explicit in prohibiting misleading reporting.
Again, implementing and properly monitoring effective controls alongside a properly cultivated corporate culture is vital to curbing the rationalisation of fraudulent behaviour. Ingraining a strong sense of professional values based on honesty and integrity is a good starting point for organisations.
Using data analytics to identify areas of noncompliance and providing effective training to rectify problems also curb the temptation to rationalise fraud. Including images and words in company policies that encourage and reward integrity can help people internalise desired behaviours.
Xose Lumor is manager, Advocacy and Professional Ethics–Management Accounting at AICPA & CIMA, together as the Association of International Certified Professional Accountants. To comment on this article or to suggest an idea for another article, contact Oliver Rowe at Oliver.Rowe@aicpa-cima.com.
AICPA & CIMA RESOURCES
Articles
“Ethics in Action: Pressure to Commit Fraud”, FM magazine, 25 January 2023
“Set Growth Objectives That Won’t Lead Employees Astray”, FM magazine, 1 December 2017
Websites
AICPA & CIMA have resources on “Fraud and Financial Crime”. AICPA members should review the AICPA Code of Professional Conduct, specifically the section “Preparing and Reporting Information”, while CIMA members and registered students should review the CIMA Code of Ethics. There are other resources on the AICPA & CIMA website, such as the “Ethics checklist”, which can help you decide next steps if you are unsure how to proceed in the face of an ethical dilemma.
For further guidance, get in touch via the CIMA Ethics helpline and support, or contact the AICPA ethics hotline at ethics@aicpa.org. While AICPA & CIMA staff are unable to give legal advice, they can talk through your concerns with you, direct you toward relevant sections of the pertinent codes and available resources, and help you consider your next steps.
