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Why do people commit fraud?

October 14, 2016 Leave a comment Go to comments

An interesting interview with Eugene Soltes, the Jakurski Family Associate Professor of Business Administration at Harvard Business School, appeared in the Harvard Business School’s Working Knowledge publication. According to the school, “his research focuses on how individuals and organizations confront and overcome challenging situations”.

Why White-Collar Criminals Commit Their Crimes is an ‘author interview’, Soltes having written Why they do it: Inside the mind of the white-collar criminal. I have not read the book, but suggest that those with continuing responsibility for detecting and/or investigating fraud might want to do so.

Soltes makes some interesting points in the interview.

  • …corporate criminals … often lived comfortable, if not extravagant lives before deciding to break the law. So why didthey do it?
  • The book dispels the idea that most corporate crooks are masterminds who carefully calculated their illegal acts, weighing the risks and rewards before embarking on their nefarious plans. ……. More often than not, they didn’t think things through at all.
  • I hope readers can take away a sense that these errors in judgment are much more failures of managerial intuitions and gut instincts, rather than failures of thoughtful reasoning
  • ……..many of the subjects in the book … exhibit an overwhelming lack of remorse for what they’ve done. In part, this is because these men are especially good at rationalization. …. it’s also because the harmful effects of a white-collar crime are less viscerally obvious to perpetrators than, say, the effects of an assault with a deadly weapon. Hit someone with a bat and you’ll undoubtedly realize the physical harm you’ve caused. But if you engage in insider trading, you likely won’t see the reaction of victims or know the specific damage you caused to many people. So while many of the men in the book are capable of feeling sorry for themselves and their families, there’s little emotional concern for their victims.

At this point in the interview, Soltes makes a critical observation.

Many of the book’s subjects seem to view their crimes as solutions to a problem at work, rather than moral failings.

He continues with a quote from Ponzi schemer Steven Hoffenberg:

Morals go out the window when the pressure is on. When the responsibility is there and you have to meet budgetary numbers, you can forget about morals….When you’re a CEO doing a Ponzi, you have to put your life into different boxes. You don’t have a choice. You have to put your family life into one box, your business in a box, your emotions in another. You’ve got no choice.

Over my decades as a chief audit executive (CAE), I performed or oversaw many investigations around the world.

These last two points ring true for several but not all the culprits.

In probably the majority of cases, the fraudster was acting in his own, personal interests. He wanted and thought he needed the money.

But, very often the individual had persuaded him or herself that they were acting in the best interests of the organization (whether that was the organization as a whole or their part of the organization).

For example:

  • One controller in South East Asia managed his reserves so that he could respond to calls from the corporate office for additional profits. His own unit was doing well, so there was no direct benefit for the controller. But, he thought he was supporting corporate interest.
  • A controller in the South of the USA created journal entries to record fictitious revenue. The intent was to prevent the business unit from reporting losses that might lead corporate management to close it down. (My team found multiple business units who had engaged in this form of fraud with the same rationalization.)
  • A senior executive in Asia directed local management to use a warehouse that he owned in partnership with executives of other organizations (who similarly directed their local management to the warehouse). The senior executive was wealthy and highly placed in the company. He didn’t need the money. But, he rationalized that this deal was good for the company.

People violate their organization’s code of ethics for all kinds of reasons.

While there are some board members and top executives who believe that if you pay people well they won’t steal, that is totally false.

Some people, as Soltes says, are capable of rationalizing anything and don’t see the harm in what they do. They have no remorse as they cannot see how any innocents are damaged.

Soltes makes a further point, that when those around you are taking advantage of opportunities, it is easy to do the same.


I found this interesting. What do you think?


  1. Peter Woods
    October 15, 2016 at 2:34 AM

    It would seem that there is no definition of fraud that is accepted by all. In many people’s minds, and I would suggest in the examples quoted, the perpetrators probably don’t believe their actions constitute fraud at all. The power of self delusion should never be underestimated.

  2. Rebecca
    October 15, 2016 at 4:33 AM

    Fraud is committed with purpose and intent to deceive and is committed when a “weakness in the wall” has been discovered. Once realizing inadequate managerial oversight exists, the fraudster can create all types of duplicitious activity in motion, such as unrecorded paid time off. Four hours here. Eight hours there. The intent is to get something without earning…and seriously, who cares? No one is minding on an individual level, anyway.

    Fraud occurs because one person succombs to the idea that “no one is watching”. Integrity and honesty are pushed aside for ill gotten gain. A weakness in oversight is found and all it takes is one act of fraud to undermine your own personal set of internal controls.

  3. October 15, 2016 at 5:25 AM

    Materialistic approach to enter in race of wealthy icons by hook & crook is main cause backed by greediness. Resultantly, business organizations drown to bottom of sea. In practical life where legal forces spent their lives in working on protection laws, on the other hand anti-protection & illegal mind set forces also start to counter activities.

  4. October 17, 2016 at 10:18 AM

    People commit fraud because of 3 distinctive factors:

    1. There is emotional or financial pressure that pushes towards fraud.
    2. There is opportunity. A viable chance to execute a plan without being caught.
    3. There is rationalization. A personal justification of dishonest actions.

    This is called the “Fraud Triangle”.

    More than 75% of frauds are executed by first time offenders. The reason for that is the people change, as well as their personal environment. What once was a brilliant and honest newly hired person, can be pushed to the brink of personal collapse a few years later; as his / her situation changes, fraud risk increases.

    From a Risk Management standpoint, this is why personnel screening, including current employees, has to be a risk identification effort done on a periodical basis. This is one of the main fraud deterrent actions a corporation must execute.

  5. Gorden Asiimwe Byakatonda, CPA
    October 18, 2016 at 12:40 AM

    Brilliant ideas have been brought forth and sure, we all appreciate the damage that can be caused by a rationalized mind. However, we must accept that human beings are crazy people, always trying to initiate new things and always ending up creating uncontrolled monsters like fraud. i have seen in my experience, where some excited personnel have abated fraud without knowing the impact of this creature on the business, other people, their economy and even on themselves. i have also seen where legislators have left slacks in the law to protect their interests leading to loose pieces of legislation being meted out to the nation only to appear unworkable later. so, in my mind, i believe fraud occurs out of many varied and often uncoordinated objectives but the common denominator is total lack of morals, plus self esteem and respect for others

  6. Jose Santiago
    October 18, 2016 at 5:09 AM

    No doubt about the points above in my limited experience fraud is usually caused due to some emotional change that may come from personal issues, work related pressures or general environmental issues. But the opportunities are what make the walk over ‘to the dark side’, something was done which was wrong but very minor, not detected by anyone, so next time the barrier is lower and the opportunity may become more visible and so it goes then the rationalisation starts there is no going back for people. Best is to neve start the process and to avoid this to have a session with each key person each year on what they have been doing vs the on line questionnaires used so often today.
    I saw a situation develop in a paper warehouse that started with an error that was lookover, this turned into a scheme that saved money for the business and made thousands for the individuals involved, but were caught early (we did thousands of tons a day) because our quality detected a slight change it he composition of the material. The customer never noticed.. but we did fortunately.

  7. October 20, 2016 at 10:37 AM

    How true Norman. I have been into forensics since 1991 and could’nt have agreed with you more. In fact more than being masterminds, I came across individuals who, they said either got influenced / encouraged by the deeds of their colleagues / friends and had adopted it or built over their ideas to perpetrate fraud and found nothing wrong in what they did.

  8. Bob R
    October 20, 2016 at 3:15 PM

    I have seen an equal number of frauds that have nothing to do with justifying their actions as done for the betterment of the organization. Like the casino marketing executive who purchased his customers’ airfares from his personally-owned travel agency at the highest possible air fare (back when TAs received substantial commissions from the airline). Or the executive who extorted 50% of his South American field agents’ commissions threatening them with being ‘reported’ to CBP and discontinuation of their business with the Company. Or the insurance manager who filed a claim with the Company’s P&C carrier to have his Porsche repaired complete with fraudulent security incident reports. Or the accounts receivable clerk who credited her personal credit card with customer refunds that went unclaimed. Or the contracts manager who fed the payer of a bribe the number to ‘beat’ to be awarded a construction contract. Only one of the perpetrators lived an extravagant lifestyle. Three admitted to carefully weighing the risks of detection vs the rewards of their actions. Two expressed remorse–perhaps only for being caught. My experience is that fraud comes in some many shapes, sizes, conditions, and dimensions, it’s hard to come up with a common profile, or at lest one that doesn’t represent the lowest common denominator of them all.

  9. Scott Webb
    October 23, 2016 at 5:23 PM

    As an auditor I think it is unhelpful to frame a discussion of fraud control in terms of individuals. We are not psychologists and certainly not competent to spot someone before they commit fraud. Some people are genuinely dishonest, others follow the herd, still others are influenced by circumstance. It must be assumed that any control weakness providing the opportunity to commit fraud together with a small likelihood of immediately being caught will be exploited. Of course, management – who are in the position to subvert internal controls – will always constitute a major fraud risk. Tone at the top and organisational culture may help to reduce that, but the risk of fraud will always exist.

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