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Chapter 2 Why People Commit Fraud

This document discusses reasons why people commit fraud. It outlines the fraud triangle, which consists of pressure, opportunity, and rationalization. Pressure can come from financial issues like living beyond one's means, work-related issues like lack of recognition, or other personal crises. Opportunity arises when there are not enough controls in place to prevent or detect fraud. Rationalization allows fraudsters to justify their dishonest acts, such as believing the organization owes them or that no one will get hurt. The document also discusses how fraudsters are sometimes recruited by others who use different types of power.

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dagohoy kenneth
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31 views

Chapter 2 Why People Commit Fraud

This document discusses reasons why people commit fraud. It outlines the fraud triangle, which consists of pressure, opportunity, and rationalization. Pressure can come from financial issues like living beyond one's means, work-related issues like lack of recognition, or other personal crises. Opportunity arises when there are not enough controls in place to prevent or detect fraud. Rationalization allows fraudsters to justify their dishonest acts, such as believing the organization owes them or that no one will get hurt. The document also discusses how fraudsters are sometimes recruited by others who use different types of power.

Uploaded by

dagohoy kenneth
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 16

Why People

Commit Fraud?
CHAPTER 2
CONTENTS
1 Types of People who commit 5 Why opportunity must be
Fraud present for fraud to occur?

2 Why people commit fraud? 6 Why people rationalize?

3 Fraud Triangle 7 How people are recruited to


participate in fraud schemes?

4 How pressure contributes


fraud?
What type of
people commit
fraud?
• Anyone!
• Not demographically or
psychologically
differentiated
• Have the profile of other
honest people
Reasons to Commit Fraud
Elements of Pressure
1
• Financial Pressures
• Vice Pressures
• Work-related Pressures
• Other Pressures
FINANCIAL PRESSURES
Individual Perpetrators Organizations
- perceived financial - companies overstate
pressures associated assets of the balance
with fraud that benefits sheet and net income
perpetrators directly on the income
• Greed statement

• Living beyond means • A poor cash position

• Inability to pay bills • Declining market

• Unexpected financial • Receivables that


aren't collectibles
VICE PRESSURES

• Worst kind of pressure


to commit fraud
• Examples are:
 Gambling
 Drug addict
 Expensive extramarital
relationships
WORK-RELATED PRESSURES OTHER PRESSURES

Motivated by these factors: Motivating factors:


• Getting little recognition • Spouse's lifestyle demands
• Job dissatisfaction • Life crisis
• Underpaid • Social pressures - need to
• Over looked for promotion appear successful
Elements of Opportunity
2
• Lack of preventive controls
• Inability to judge quality
performance
• Failure to discipline fraudster
• Lack of access to information
• Ignorance
• Lack of audit trail
Controls to
prevent/detect
fraud
Control Environment Accounting System
 Management role model Transactions are:
 Management 1. Valid
communication 2. Properly authorized
 Appropriate hiring 3. Complete
 Clear organizational 4. Properly classified and
valued
structures
5. Reported in the proper
 Effective internal audit
period
Controls to
prevent/detect
fraud

Control Activities or
Procedures
 Segregation of Duties
 System Authorization
 Independent Checks
 Physical safeguards
3 Elements of Rationalization
• Most fraud perpetrators are
first time offender who would
commit any crimes
• In some way, they must
rationalized away the
dishonesty of their acts
ommon rationalizations used by fraud
perpetrators include the following:
The organization owes me.
I am only borrowing the money and will pay it
back.
Nobody will get hurt.
I deserve more.
It is for a good purpose.
Something has to be sacrificed- my integrity
or my reputation.
Recruitment of Fraudster
• Many frauds are committed by more than one
person
• The majority of frauds- especially financial
statements frauds- are collusive
Recruitment of Fraudster
Types of Power
• Rewards Power - A's ability to provide
benefits to B
• Coercive Power- A's ability to punish
B if B does not comply to A
• Expert Power- A's possession of
special knowledge or expertise
• Legitimate Power- A's legitimate right
to prescribe behavior for B
• Referent Power- The extend to which
B identifies with A
THANKS

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