What in the World Were You Thinking?! Inside the Mindset of Fraud Perpetrators *

By Kramer, Bonita K. Peterson; Seda, Michael A. | International Journal of Psychology Research, July 1, 2017 | Go to article overview

What in the World Were You Thinking?! Inside the Mindset of Fraud Perpetrators *


Kramer, Bonita K. Peterson, Seda, Michael A., International Journal of Psychology Research


Introduction

Some popular movies and television series or documentaries have depicted various aspects of fraud, such as "Catch Me If You Can," "Fargo," "The Sopranos," and "Enron: The Smartest Guys in the Room." Despite the entertainment value of fraud by Hollywood, in reality, fraud causes significant financial, emotional, and life-changing impacts, none of which are entertaining to those directly and even indirectly involved.

Most people would agree that fraud has become a significant problem in our society. The Association of Certified Fraud Examiners (ACFE), arguably the premiere organization studying fraud and educating others about fraud, was established in 1988 and is based out of Austin, Texas. The ACFE conducted a survey of Certified Fraud Examiners for the first time in 1996 and subsequently expanded the survey to every two years beginning in 2002. In 2010 the ACFE began to include international responses in its survey. The results have been compiled and published in its Report to the Nations on Occupational Fraud and Abuse, available in hard copy and electronically. In its most recent report, the ACFE finds that organizations lose typically 5% annually to fraud. If that percentage loss is applied to the estimated Gross World Product, the fraud loss globally is projected to equal almost $3.7 trillion (ACFE, 2016). Fraud is not a recent phenomenon, however, but one that has existed for thousands of years. The Bible itself records instances of fraud, including Judas, who embezzled during his tenure as a disciple (John 12:6).

Just as fraud statistics are estimates because not all cases of fraud are discovered and not all discovered cases are reported, there is no foolproof formula that will identify a fraud perpetrator. Each person on this planet is unique. Consequently, conditions that may cause one person to commit fraud may not entice another person to do the same. However, researchers have identified some insight into the minds of fraud perpetrators. The purpose of this chapter is to review this research in general chronological order after defining fraud and presenting the three basic categories of fraud, to provide recent statistics on the reasons why people commit fraud, and to illustrate some of the reasons with an actual fraud case.

Fraud: Definitions and Categories

The ACFE defines "occupational fraud" as "the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets" (ACFE, 2011, p. 16). Per Black's Law Dictionary, fraud is defined as

"...a generic term, embracing all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false suggestions or by suppression of truth, and includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated." (Black, 1979, p. 468).

Regardless of how fraud is defined, it involves deceit, which is inevitably intentional.

The ACFE further sub-classifies fraud into three major categories: asset misappropriation, fraudulent financial statements, and corruption (Wells, 2004). The three categories are defined as:

* Asset misappropriation: the theft or misuse of an organization's assets (e.g., skimming revenues, stealing inventory, committing payroll fraud);

* Fraudulent financial statements: falsification of an organization's financial statements by overstating revenues and/or understating liabilities or expenses, which will make the financial statements appear stronger than they truly are; and

* Corruption: situations where fraudsters wrongfully use their influence in business transactions to obtain some benefit for themselves or another person (e.g., conflicts of interest, accepting kickbacks or bribes).

The ACFE consistently has found that asset misappropriation occurs most frequently, while financial statement fraud is the least often discovered category of fraud (Figure 1). …

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