As a follow-up to our previous article, “Occupational Fraud,” where we discussed the three common elements associated with fraud schemes: opportunity, pressure (or incentive), and rationalization. The pure existence of these three elements alone does not necessarily suggest fraud will occur. Often unrecognized and unnoticed is the fundamental reasoning for the fraudulent activity – the element of the human mind and individual behaviors.
As acknowledged by Grace Duffield and Peter Grabosky, in “The Psychology of Fraud,” behavioral scientists have yet been able to identify a psychological characteristic that serves as a valid and reliable marker of the propensity of an individual to commit fraudulent behaviors. Nevertheless, research has shown individuals with certain characteristics and personality traits will increase the likelihood for fraud to occur.
Explained in “The Fraud Diamond: Considering the Four Elements of Fraud,” David Wolfe and Dana Hermanson have incorporated the human element, capability, into the fraud triangle. An individual’s personality traits and capability have a direct impact on the probability of fraud. As stated by Wolfe and Hermanson:
“Opportunity opens the doorway to fraud, and incentive (pressure) and rationalization can draw a person toward it; but the person must have the capability to recognize the open doorway as an opportunity and to take advantage of it by walking through, not just once, but time and time again”
Below summarizes the six traits, associated with the capability element, Wolfe and Hermanson believe are essential in the personality of the fraudster.
Positioning: The person’s position or function within the organization may provide the ability to create or exploit an opportunity for fraud. A person in a position of authority has more influence over particular situations or the environment.
Intelligence and creativity: The fraudster is smart enough to understand and exploit internal control weaknesses and to use position, function, or authorized access to the greatest advantage.
Ego: The individual must have a strong ego and great confidence he will not be detected. The common personality types include someone who is driven to succeed at all costs, self-absorbed, self-confident, and often narcissistic. According to the Diagnostic and Statistical Manual of Mental Disorders, narcissistic personality disorder is a pervasive pattern of grandiosity, a need for admiration and a lack of empathy for others. Individuals with this disorder believe they are superior, unique, and they are likely to have inflated views of their own accomplishments and abilities. They focus on how well they are doing in comparison with others, and can take the form of an excessive need for attention; a sense of entitlement is evident and these individuals expect to be given whatever they want regardless of the imposition it places on others.
Coercion: A fraudster can coerce others to commit or conceal fraud. An individual with a persuasive personality can more successfully convince others to go along with the fraud or look the other way.
Deceit: Successful fraud requires effective and consistent lies. In order to avoid detection, the individual must be able to lie convincingly, and must keep track of the overall story.
Stress: The individual must be able to control their stress, as committing the fraudulent act and keeping it concealed can be extremely stressful.
Addressing the capability element will assist in the prevention and detection of fraudulent activity within your company. Many experts, including Wolfe and Hermanson promote that a straightforward preventative measure – interaction with your top executives; There really is no better alternative than spending time with a person.
Our next article will discuss other fraud deterrence measures and how to increase checks and balances at higher levels where there is potential for fraud.
Special thanks to Linda Snyder, BS and MA Psychology. Linda is a Senior Staff in UHY’s Forensic Litigation and Valuation Services Group.
Frank E. Rudewicz serves as Principal and Counsel of Marcum LLP and heads the Forensic, Investigative and Valuation Advisory practice for the New England area. He has more than 26 years experience conducting domestic and international investigations for anti-trust/anti-competitive issues, harassment, fraud, ethics and other employment related conduct.