Fraud covers an assortment of irregularities and illegal acts distinguished through intentional deception. The legal definition of fraud is defined as:
- A representation about a material fact
- Which is false
- And made intentionally, knowingly, or recklessly so
- Which is believed
- And acted upon by the victim
- To the victim’s damage
The stages of fraud can be exemplified by The Fraud Triangle (figure 1). People who commit fraud are normally able to do so due to a combination of opportunity, pressure, and a rationalization.
The Fraud Triangle
Most frauds, particularly the really large ones (WorldCom, Enron, etc.), could not have transpired lacking a combination of the right person with the right capabilities. Opportunity provides the possibility of a fraud occurring, and incentive and rationalization can move the individual toward committing a fraud. But the individual requires the ability to distinguish the “opportunity” and to derive benefit from the opportunity. This will then generally occur, not just once, but time and time again.
Frauds are more often discovered due to repeated occurrences.
Figure 1 The fraud Triangle
Opportunity is usually presented through a combination of events leading to a weakness in the internal controls. Some examples include inadequate (or non-existent):
- Supervision and review,
- Separation of duties,
- Management approval, and
- System controls (including monitoring).
Pressure (or incentive) can face an individual due to a combination of factors such as:
- Financial problems,
- Family breakdowns,
- Personal vices (gambling, drugs, prostitution, extensive debt, etc.), and
- Unrealistic deadlines and performance goals being set by the organization.
Rationalization transpires when a person learns to justify their activities. They start to see their fraud as being acceptable. The process of rationalizing fraud varies by circumstance and the personality of the individual. Some examples of justifications that have been stated in fraud cases include:
- “I really needed the money and I did intend to return it I got my pay check”,
- “I’d rather have the company on my back than the IRS”,
- “The company has more money than they know what to do with. My little bit should not have been noticed”,
- “Those criminals in head office are bigger crooks than I am”, and
- “I just can’t afford to lose everything. I have worked too hard to get my home and my car. I could not stand to lose everything”.
It is essential to consider controls that minimize the chances and effect of fraud in an organization.
 See Occupational Fraud Abuse, by Joseph T. Wells, CPA, CFE (Obsidian Publishing Co., 1997) and
Fraud Examination, by W. Steve Albrecht (Thomson South-Western Publishing, 2003).