Why People Commit Fraud

Renee Sylvestre-Williams

Filed under: Fraud

Walletpop has been talking about the ways to prevent fraud and how to keep your information safe. Here are some of our recent articles:

One question always comes up when talking about fraud - why do people commit fraud? The simple answer is often because they can but Pamela Murphy, Assistant Professor at Queen's School of Business says, "Fraud is much more likely to occur when three factors are in place: opportunity, motive and attitude or rationalization. Together, these factors are known as the fraud triangle."

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Murphy researches the psychology of fraud, looking at what pushes a person to commit (or not commit) fraud when the opportunity is present. We asked a few questions and Professor Murphy shared her research with us:

Fraud continues to be popular costing people millions every year. How do people get into committing fraud?

From a psychological standpoint, there are two ways people commit fraud. First, some people are "predisposed". There is something in their nature that makes them more likely to commit fraud in the presence of opportunity and motive. Examples include psychopaths and individuals who are high in Machiavellianism or high in narcissism. Research has linked these three types of individuals to highly unethical and illegal behavior. Psychopaths, for instance, represent less than one per cent of the general population but represent around 15 per cent of the prison population.

The second way we can commit fraud is through rationalization. For those of us who are not "predisposed" – for most of us – we resist committing fraud because we know it is wrong and we would feel guilty if we committed it. The slippery slope for us is how well we can rationalize. Rationalization is a way to justify our behavior to make it seem acceptable. There are many examples such as:

1. Transferring the blame: arguing that the victim had it coming, that everyone does it, or that someone told them to do it.

2. Moral justification: arguing they are helping the company or their family.

3. Ignoring the consequences: arguing they aren't hurting anyone, or not hurting them badly.

What is the justification for getting involved in fraud? Is it always a deliberate act or can people fall into accidentally committing fraud?

The justification for getting involved in fraud usually depends upon the circumstances. Unfortunately, people can fall into accidentally committing fraud. For example, if they see others around them doing questionable things, they can start doing questionable things themselves because "everyone does it". To the extent the circumstances provide reasonable rationalizations, individuals are more likely to commit fraud and feel perfectly fine about it. I believe that predatory fraud is often started by at least one "predisposed" individual who is able to recruit others. My research indicates that many frauds, especially larger frauds, are perpetrated by groups of individuals.

How can you tell the people who might be or will commit fraud? What are the common (if any) factors? If you work for a financial institution, how can you filter potential hires?

There are psychological surveys that identify each of the three "predisposed" groups I mentioned above. However, requiring individuals to take personality tests has drawbacks. For example, some argue that such a requirement constitutes an invasion of privacy. Others argue that we might jump to conclusions based on the results. For example, is it fair to label someone as a potential fraudster because he or she scored higher in Machiavellianism? Alternatively, managers and those in HR should be aware of words or deeds that signify any of these three traits. By studying the three character traits, perhaps they would be better able to spot potential problems before they occur.

Rather than focusing so much attention on "predisposed" individuals, I believe it is equally if not more important to pay attention to the organization's climate or culture. Though I don't have any hard statistics on the proportion of individuals who are high Machiavellians or narcissistic, I believe they represent a relatively small proportion of the general population.

Additionally, my research indicates that an organization's perceived climate often has a major impact on fraudulent behaviour. I focus on the word "perceived" for an important reason. We commit fraud based on our perceptions, and there is a gap between what top management and employees perceive their organization's climate to be.

A survey in The Economist (September 2011) reports that while 41 per cent of executives feel their firm rewards performance based on values rather than merely on financial results, only 14 per cent of employees agreed. My research indicates that more fraud occurs in organizations that reward employee performance based on profit rather than values.

Given the discussion above, I strongly encourage management of every organization to regularly and anonymously survey employees. They may find areas where the climate is less than optimal, or even a breeding ground for potential fraud. A simple survey can be an effective fraud prevention tool, along with training and awareness in the psychological aspect of fraud.

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