The chapter begins with the case of Patricia K. Smith, a former controller at Baierl Acura, who embezzled $10.3 million from 2004 to 2011 to fund lavish spending, including private jet fares and Vatican tours. Her actions highlight the paradox of a trusted employee engaging in fraud, prompting an exploration of why seemingly "good" individuals commit such acts.
Structured across five modules, the chapter aims to:
Describe occupational fraud and its criminological context (Module 1).
Apply the fraud triangle to understand fraudster motivations (Module 2).
Explore refinements to the fraud triangle, including personal integrity and organizational influences (Module 3).
Analyze complex fraudster profiles, such as predators and collusive groups, using frameworks like M.I.C.E. (Module 4).
Evaluate the fraud triangle’s limitations in court and introduce the triangle of fraud action for evidence-based investigations (Module 5).
Criminology, the study of crime and criminals, frames fraud as a sociological phenomenon. Most people obey laws due to fear of punishment, desire for rewards, or moral alignment with societal norms. However, fraudsters—often first-time offenders—exploit positions of trust, as seen in the case of Bethany, an office manager who doubled her income by charging personal expenses to a company credit card.
Occupational Fraud and Abuse: Defined as using one’s occupation for personal enrichment through deliberate misuse of organizational resources. It includes asset misappropriation, fraudulent statements, and corruption.
White-Collar Crime: Coined by Edwin Sutherland, it refers to crimes by respected professionals, often involving trust violation.
Organizational Crime: Involves legitimate organizations (e.g., corporations) engaging in offenses like financial reporting fraud or tax evasion.
Organized Crime: Complex schemes involving multiple entities, often crossing borders, such as money laundering or racketeering.
Forensic accountants play a key role in civil litigation, analyzing monetary damages in torts (e.g., negligence, contract interference) and ensuring claims align with evidence.
Developed by Donald R. Cressey based on interviews with 200 embezzlers, the fraud triangle identifies three elements necessary for fraud:
Perceived Pressure: Nonshareable financial problems, such as gambling debts or living beyond one’s means. Cressey categorized these into six types: violations of ascribed obligations, personal failures, business reversals, physical isolation, status gaining, and employer-employee relations.
Perceived Opportunity: Knowledge of exploitable control weaknesses and technical skills to execute fraud, often tied to job roles (e.g., accountants manipulating checks).
Rationalization: Justifications that allow fraudsters to reconcile their actions with their self-image, such as “borrowing” money or believing “everyone does it.” Rationalizations vary by fraudster type (e.g., independent businessmen, long-term violators, absconders).
3.2 ACFE Insights
The ACFE’s 2016 Report to the Nations notes that fraudsters are typically male, middle-aged, well-educated, and trusted employees with no criminal history. Losses increase with tenure and authority, with executives causing median losses of $703,000 compared to $65,000 for employees.
3.3 Application
The fraud triangle explains situational fraudsters who act under pressure but does not fully account for all fraud types, necessitating further exploration.
Personal Integrity: Albrecht’s fraud scale replaces rationalization with integrity, suggesting low integrity heightens fraud risk.
Capability: Wolfe and Hermanson’s fraud diamond adds capability, encompassing traits like intelligence, position, and stress tolerance, which enable fraud execution.
Gender and Organizational Influence: Hollinger and Clark’s research shows younger employees are more likely to engage in deviance, but senior employees cause larger losses. Organizational culture, such as weak tone at the top, exacerbates fraud risk.
Hollinger and Clark emphasize the “perception of detection” as a key deterrent. Informal controls, like peer respect, are more effective than formal sanctions, which fraudsters often believe they can evade.
The M.I.C.E. acronym (Money, Ideology, Coercion, Ego/Entitlement) expands on fraud motivations:
Money: Greed drives cases like Enron and WorldCom.
Ideology: Rare, but seen in tax fraud or terrorist financing.
Coercion: Lower-level employees may be pressured into fraud.
Ego/Entitlement: Explains cases like Thomas Coughlin, a Wal-Mart executive who defrauded $500,000 despite a $6 million salary, possibly driven by power or entitlement.
Situational Fraudsters: Fit the fraud triangle, acting due to temporary pressures (e.g., financial distress). They are typically first-time offenders.
Predatory Fraudsters: Deliberate repeat offenders, like Christopher Woods’ father, who killed his son for insurance money to cover prior frauds. Predators replace pressure and rationalization with arrogance and a criminal mindset, requiring only opportunity.
The ACFE reports that nearly half of fraud cases involve collusion, which increases losses by undermining controls like separation of duties. Collusive fraudsters, often younger males with vendor ties, leverage group dynamics to enhance opportunity and rationalize actions.
Cancer Fraud Cases: Individuals faked cancer to gain small sums, driven by emotional manipulation or ego rather than significant financial gain.
Phar-Mor Fraud: Managers committed financial statement fraud to buy time, motivated by non-monetary pressures like meeting expectations.
The fraud triangle’s reliability has been questioned in U.S. courts (e.g., Haupt v. Heaps, Travis v. State Farm), as it relies on subjective judgments about motive and rationalization, which are not directly observable. Courts reject it as speculative “state-of-mind” evidence.
The triangle of fraud action offers an evidence-based alternative, focusing on:
Act: The fraud’s execution (e.g., falsifying records).
Concealment: Methods to hide the fraud (e.g., false journal entries).
Conversion: Benefits gained (e.g., laundered money). This model supports courtroom testimony by providing observable, documentable evidence, strengthening investigations and prosecutions.
The meta-model integrates the fraud triangle (perpetrator perspective) with the triangle of fraud action (criminal act perspective), bridged by antifraud measures like internal controls and governance. It emphasizes evidence over speculation for robust case-building.