Module 3 FRAUD & FRAUD RISL ASSESSSMENT

3.0 Introduction
Fraud has become an industry, and not just for the fraudsters. Academics,
investigators, internal and external auditors, lawyers, management on all levels
of both public and private organisations, oversight bodies and the general public
are all affected by fraud in some way or another.
3.1 Unit objectives

By the end of this unit students should be able to

• Define fraud and the different categories;
• Identify the factors that cause employees and managers to commit fraud/
why do people commit fraud.
• How fraudsters can be identified
• Elements of fraud

3.2 Fraud and its impact on organizations

Fraud and corruption is not only costing much of organization revenue, but there are many
other stakeholders and future generations that are being affected. On average, an employee
can steal $30 per day without being detected for even up to 10 years and can you imagine
this happening to you from all your employees! Surely your business will be dying slowly and
the next thing we hear is so and so organization has been placed under judicial management
or is even under liquidation. While mismanagement and other related matters can contribute
towards liquidation, fraud perpetrated inside or outside, is the major culprit.
Fraud has become an industry, and not just for the fraudsters. Academics,
investigators, internal and external auditors, lawyers, management on all levels
of both public and private organisations, oversight bodies and the general public
are all affected by fraud in some way or another.
The nature of economic crime changes constantly. Rapid technology changes,
globalisation and the relaxation of trade barriers are among the factors that
create opportunities for new and more sophisticated methods of fraud. Recent
years have seen commercial crime grow both in quantity and sophistication. The
turbulent economy, caused by the global economic slowdown currently
experienced, is causing many businesses and individuals to face the greatest
financial concerns in recent memory. Financial pressure experienced by
individuals, organisations cutting expenses and the risk of job losses causes
reduced morale and fear to increase. The combination of these conditions may
create an environment ripe for fraudulent activity which may send already
struggling organisations to financial brink. (ACFE: 2009:2)
Although most people and even researchers believe that fraud is increasing
and likely to increase even further in future, both in size and frequency, it is very
difficult to know for sure. First, it is impossible to know what percentage of fraud
perpetrators is caught. Whether or not there are perfect frauds that are never
discovered, or whether all frauds are eventually discovered, is not known. In
addition, many frauds that are discovered are handled quietly within the victim
organisation and never made public. In many cases, organisations merely hide
the frauds and quietly terminate or transfer perpetrators rather than to go
public.
The Association of Certified Fraud Examiners (ACFE) conducts some of the
most comprehensive fraud studies in the world. In their 2010 Report on
Occupational Fraud and Abuse, which was based on 1843 cases of occupational
fraud that occurred worldwide between January 2008 and December 2009, the
Association for Certified Fraud Examiners (ACFE) estimated that the average
organisation lost 5 percent of its annual turnover to fraud. Applied to the 2009
Gross World Product, this figure translates to a potential total fraud loss of more
than $2, 9 trillion. The ACFE concluded that fraud is a global problem. Though
some of their findings varied slightly from region to region, most of the trends in
fraud schemes, perpetrator characteristics and anti-fraud controls are similar,
regardless of where the fraud occurred. (ACFE 2010:4±5)
Even with the difficulties in measuring fraud, most people believe that fraud is a growing
problem. In South Africa, 68% of the respondents who participated in
KPMG's Africa Fraud and Misconduct Survey responded that fraud is likely to
increase in South Africa. Because fraud affects how much we pay for goods and
services, we all pay not only a portion of the fraud bill, but also for the detection
and investigation of fraud.
It is almost impossible to read a newspaper or business magazine without
coming across multiple incidents of fraud.
3.3 What is Fraud
The modern definition of fraud is derived primarily from case and statute law, but many of
the ancient elements remain. Those roots can be traced to fraud, a Latin noun carrying a wide
range of meanings clustered around the notions of harm, wrongdoing, and deceit. The
modern definition derived from case law focuses on the intent of the fraudster(s) to separate
the trusting victim from property or a legal right through deception for their own benefit. This
deception involves any false or misleading words or actions or omissions or concealment of
facts that will cause legal injury. Criminal prosecution of fraud must prove beyond a
reasonable doubt that an act meeting the relevant legal definition of fraud has been
committed by the accused. In civil cases, liability must be demonstrated on a balance of
probabilities, supported by the preponderance of the evidence.
Fraud is a broad category of financial-related crimes and includes confidence schemes, art
forgery, falsified scientific research data, lying on a resume, falsifying an insurance claim,
cheating on income taxes, and hundreds of other possible schemes that would fall under the
term "fraud." White-collar crime should be viewed as a subclass of fraud. Individuals commit
white-collar crime by embezzling funds, manipulating accounts, receiving bribes, or
committing other schemes through their place of business. What they all have in common,
however, is the intent to deceive. This book limits the discussion to the field of white-collar
crimes committed against organizations, businesses, and their accounting systems, and will
not discuss consumer and other types of fraud.
The legal definition of fraud is the same whether the offense is criminal or civil; the difference
is that criminal cases must meet a higher burden of proof. For example, let us assume an
employee who worked in the warehouse of a computer manufacturer stole valuable
computer chips when no one was looking and resold them to a competitor. This conduct is
certainly illegal, but what law has the employee broken? Has he committed fraud? The
answer, of course, is that it depends. Let us briefly review the legal ramifications of the theft.
1. There was a taking or carrying away
2. Of the money or property of another
3. Without the consent of the owner and
4. With the intent to deprive the owner of its use or possession.
In our example, the employee definitely carried away his employer’s property, and we can
safely assume that this was done without the employer’s consent. Furthermore, by taking the
computer chips from the warehouse and selling them to a third party, the employee clearly
demonstrated intent to deprive his employer of the ability to possess and use those chips.
Therefore, the employee has committed larceny.
The employee might also be accused of having committed a tort known as conversion.
Conversion, in the legal sense, is “an unauthorized assumption and exercise of the right of
ownership over goods or personal chattels belonging to another, to the alteration of their
condition or the exclusion of the owner’s rights.” A person commits a conversion when he or
she takes possession of property that does not belong to him or her and thereby deprives the
true owner of the property for any length of time. The employee in our example took
possession of the computer chips when he stole them, and, by selling them, he has deprived
his employer of that property. Therefore, the employee has also engaged in conversion of the
company’s property. Furthermore, the act of stealing the computer chips also makes the
employee an embezzler. “to embezzle means wilfully to take, or convert to one’s use,
another’s money or property of which the wrongdoer acquired possession lawfully, by reason
of some office or employment or position of trust.” The key words in that definition are
“acquired possession lawfully.” In order for an embezzlement to occur, the person who stole
the property must have been entitled to possession of the property at the time of the theft.
Remember, possession is not the same as ownership. In our example, the employee might be
entitled to possess the company’s computer (to assemble them, store them, etc.), but clearly
the chips belong to the employer, not the employee. When the employee steals the chips, he
has committed embezzlement.
We might also observe that some employees have a recognized fiduciary relationship with
their employers under the law. The term fiduciary, according to Black’s Law Dictionary, is of
Roman origin and means “a person is holding a character analogous to trustee, in respect to
the trust and confidence involved in it and the scrupulous good faith and candor which it
requires. A person is said to act in a ‘fiduciary capacity’ when the business which he transacts,
or the money or property which he handles, is not for his own benefit, but another person,
as to whom he stands in a relation implying and necessitating great confidence and trust on
the one part and a high degree of good faith on the other part.”5 in short, a fiduciary is
someone who acts for the benefit of another.
Fiduciaries have a duty to act in the best interests of the person whom they represent. When
they violate this duty, they can be liable under the tort of breach of fiduciary duty. The
elements of this cause of action vary among jurisdictions, but in general they consist of the
following:
1. A fiduciary relationship existed between the plaintiff and the defendant
2. The defendant (fiduciary) breached his or her duty to the plaintiff
3. The breach resulted in either harm to the plaintiff or benefit to the fiduciary . A fiduciary
duty is a very high standard of conduct that is not lightly imposed. The duty depends upon
the existence of a fiduciary relationship between the two parties. In an employment scenario,
a fiduciary relationship is usually fount to exist only when the employee is “highly trusted”
and enjoys a confidential or special relationship with the employer. Practically speaking, the
law generally recognizes a fiduciary duty only for officers and directors of a company, not for
ordinary employees. (In some cases a
quasi-fiduciary duty may exist for employees who are in possession of trade secrets; they
have a duty not to disclose that confidential information.) The upshot is that the employee in
our example most likely would not owe a fiduciary duty to his employer, and therefore he
would not be liable for breach of fiduciary duty. However, if the example were changed so
that an officer of the company stole a trade secret, that tort might apply.

Definitions of Fraud
Black's Law Dictionary defines fraud as follows:
A knowing misrepresentation of the truth or concealment of a material fact to induce another
to act to his or her detriment. It could be a tort (civil matter) or it could be criminal

FBI Definition of Fraud

The Federal Bureau of Investigation (FBI) offers a definition of fraud that is applicable to
today's schemes and general understanding and that also incorporates the elements
recognized over the centuries: Lying, cheating, and stealing. That's white-collar crime in a
nutshell.
Financial fraud, including theft and embezzlement, is criminal fraud of the white-collar type
and is the subject of this book. It is committed against- organizations by both employees and
outsiders such as vendors and contractors.

ACFE defines 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.”
The Association of Certified Fraud Examiners defines financial statement fraud as the
intentional, deliberate misstatement or omission of material facts or accounting data that is
misleading and, when considered with all the information made available, that would cause
the reader to change or alter his or her judgment or decision. In other words, the statement
constitutes intentional or reckless conduct, whether by act or omission, that results in
material misleading financial statements
Legal Elements of Fraud
Under common law, fraud includes five essential elements:
• A representation about a material fact, which is false;
• And made intentionally, knowingly, or recklessly;
• Which is believed;
• And acted upon by the victim; and
• To the victim’s damage.
3.4 Examples of fraud and other economic crimes
According to Rezaee (2002) fraud is a term used to describe any deliberate act to deceive or
mislead another person, causing harm or injury. There are many different types of fraud, and
many ways to characterize and catalogue fraud. There are two types of fraud according to
Golden et al (2006) namely, financial statement fraud and misappropriation of assets. Major
Categories of Fraud
Asset misappropriation
It involves the theft or misuse of an organization’s assets. (Common examples include
skimming revenues, stealing inventory, and payroll fraud.) Corruption entails the unlawful
or wrongful misuse of influence in a business transaction to procure personal benefit,
contrary to an individual’s duty to his or her employer or the rights of another. (Common
examples include accepting kickbacks and engaging in conflicts of interest.)
Financial statement fraud and other fraudulent statements involve the intentional
misrepresentation of financial or nonfinancial information to mislead others who are
department on it to make economic decisions. (Common examples include overstating
revenues, understating liabilities or expenses, or making false promises regarding the safety
and prospects of an investment)
3.4.2 Financial statement fraud
As discussed in chapter five, financial statement fraud is a deliberate misstatements and
omissions of amounts or disclosures of financial statements to deceive financial statement
users, particularly investors and creditors. Financial statement has been discussed in detail in
unit five. It has been defined by Treadway commission report (not dated) as “intentional or
reckless conduct, whether by act or omission, that results in material misleading financial
statements.” financial statement fraud is perpetrated by management, as they are
responsible for producing reliable financial reports and the four presentation, integrity, and
quality of financial reporting process is the management’s responsibility. Financial statement
fraud affects all its users.
Even though the specific schemes vary, the major areas involved in financial statement fraud
include the following:
1. Fictitious revenue (and related assets)
2. Improper timing of revenue and expense recognition
3. Concealed liabilities
4. Inadequate and misleading disclosures
5. Improper asset valuation
6. Improper and inappropriate capitalization of expenses
The essential characteristics of financial statement fraud are (1) the misstatement is material
and intentional, and (2) users of the financial statements have been misled.
In recent years, the financial press has had an abundance of examples of fraudulent financial
reporting. These include Enron, WorldCom, Adelphia, Tyco, and others. The common theme
of all these scandals was a management team that was willing to “work the system” for its
own benefit and a wide range of stakeholders- including employees, creditors, investors and
entire communities- that are still reeling from the losses. In response, Congress passed the
Sarbanes-Oxley Act (SOX) in 2002. SOX legislation was aimed at auditing firms, corporate
governance, and executive management (CEOs and CFOs), officers, and directors. The
assessment of internal controls, preservation of evidence, whistle blower protection, and
increased penalties for securities fraud became a part of the new business landscape.
3.4.2 Misappropriation of assets
Misappropriation of assets occurs when employees, especially company directors, they often
use official vehicles, computers and other facilities for personal interests. Most business
assets maybe stolen by employees or third parties, or by illegal cooperation of employees and
third parties. Misappropriation of assets maybe called employee fraud as it involves
employees colluding with others to perpetrate frauds (Golden et al, 2006). These frauds
include bribery, conflict of interest, embezzlement of money and property, theft of trade
secrets of intellectual property and so on.
3.4.3 Bribery
Bribery includes schemes such as cuts, kickbacks or commission, bid rigging, gifts or gratuities
and manipulation of contracts. Employees collude with third parties to use his role as an
employee to obtain a personal benefit. Manning (2005) says bribery is used to gain an
improper advantage over others through intervention of corrupt employee. Manning also
defined bribery as the giving of something of value by another party without the employer’s
knowledge, to a decision maker or decision influencer in exchange for influence in a decision
making process. The loss of the bribe may not materialize to the business early as the
employer does not directly steal anything; the loss will materialize in the long run. The loss
will be through the loss of competitive advantage, higher costs or lower quality supplies that
will affect the business both in monetary terms and in reputation. The following are some
types of bribes:
• Overbilling schemes
An employee is given bribe, so that the employee prefers the supplier over other suppliers.
The goods maybe of a higher price than they should, or they maybe of lower quality than
expected. The overpricing is the profit made from the bribe.
• Under-pricing schemes
This is when an employee receives a bribe and in return the business sells goods and services
at prices that are below or on conditions that are less favourable to the business. The benefit
of the purchaser is they get a better deal than they are entitled to get. The business gets a
lower consideration than they should have made, and the cost saving is the profit made from
the bribe.
• Promotions
Granting promotions to employees within the business that is the briber gets promoted above
other more qualified people or hiring of unsuitable employees.
3.4.5 Conflict of interest
Directors have a fiduciary duty to disclose any personal interest in any transaction in the
business. (More is discussed about duties of directors in business law 2 BACC205) When they
fail to disclose their personal interest in a transaction it will result in conflict of interest fraud.
In conflict of interest fraud, the benefit is derived directly or indirectly by the employee from
acting in their self-interest. According to Manning (2005) conflict of interest occurs when an
employee takes advantage of their employer’s trust, when the employer doesn’t realise the
employee’s ulterior motive of their actions.
3.4.6 Embezzlement of money and property
This is when an employee trusted by business funds or property manipulate business records
to hide the theft of funds or property. Embezzlement of money and property occurs on all
levels of business:
• accounts clerk stealing petty cash
• top government official stealing large investment sums
• bank teller who pockets deposits
• bookkeeper who takes customer refunds for himself
• payroll clerk who doesn’t deposit correct amount of PAYE, keeping the rest for himself
3.4.6 Theft of trade secrets of intellectual property
Trusted employees misuse their privileges to gather and steal sensitive information (Caputo,
2009). Trade secrets are devices, formulas or compilation of information which a business use
to its economic advantage. This information is usually protected by use of password and can
only be accessed by top level employees in a business. Examples of theft of trade secrets of
intellectual property according to Chicago trade secret lawyers (not dated) are:
• sell of information to a competing business
• working for a competing business
• starting a competing business
3.5 Theories on why employees’ committee fraud
In order to prevent and detect fraud forensic auditors need to understand how the fraudsters
think and act. This module will use the theory of Fraud triangle, Fraud diamond, White collar
crime and Fraud scale. The theories highlight 10 fertile grounds that allow a person or
employee to committee fraud namely Opportunity , Low chance of getting caught,•
Rationalization in the fraudsters mind, and
• Justification that results from the rationalization.
3.5.1 The Fraud Triangle theory
Fraud triangle theory which has been provide by Cressey (1950) is critically important in
identify push factors to commit fraud. The fraud triangle theory states that the likelihood of
fraudulent activities significantly increases when a person has necessary knowledge, ability
and opportunity According to Cressey fraud occurs as a result of the interplay between three
factors: opportunity, incentive or pressure, and attitude or rationalization. The three
components are perceived opportunity, perceived pressure and rationalization as shown in
Figure 2.2.

Figure 1.1: The Fraud Triangle Theory

Source: Rasha and Andrew (2012)

Opportunity is an open door for solving a non-shareable problem in secret by violating a trust.
• Opportunity is generally provided through weaknesses in the internal controls
• Some examples include inadequate or no:
Supervision and review
Separation of duties
Management approval
System controls

How easy is it for an employee to commit fraud? Does the employee believe they will not get
caught?There is a weakness in the system that the right person could exploit. Fraud is
possible.Weak internal controls, poor management oversight, and poor separation of duties
are key factors on the opportunity employees have on committing a fraudulent act.

A perceived opportunity to commit fraud may exist when an individual believes internal
control can be overridden, for example, because the individual is in a position of trust or has
knowledge of specific deficiencies in internal control.Poor internal controls ,,Management
override of internal controls , Collusion between employees and
Collusion between employees and third parties.
The opportunity to commit and conceal the fraud is key to encouraging fraud.
Pressure
Pressure may be anything from unrealistic deadlines and performance goals to personal vices such
as gambling or drugs.
• I want something but I don’t have the money for it;
• These guys are paying me peanuts how do they expect me to survive?
• I am suffering despite my high qualification and hard work
(Pressure is the aspect of what causes the employee to commit fraud.
This may be pressure from having to pay bills, drug or alcohol problems, or simply living
beyond one‟s means.)
pressure can be a financial pressure, non-financial, or political and social pressure. Non-
financial pressure can be derived from a lack of personal discipline or other weaknesses such
as gambling habit, drug addiction. While, political and social pressure occurs when people feel
they cannot appear to fail due to their status or reputation.

Rationalization
The last element to the fraud triangle is rationalization, meaning the person can justify their
actions. Rationalization is a crucial component of most frauds because most people need to
reconcile their behaviour with the commonly accepted notions of decency and trust.
They may believe that they have to commit the fraud in order to pay for their mortgage,
gambling problem, or for mounting family medical bills.
I have convinced myself that this fraudulent behavior is worth the risks.
Many times, the individual views the fraud as “borrowing” and believes they will pay it back
in the future; which seldom happens.)
. Some examples include:
• I really need this money and I’ll put it back when I get my pay cheque
• I’d rather have the company on my back than Zimra
• I just can’t afford to lose everything – my home, car, everything

According to Manurung and Hadian (2013), the pressure to commit fraud emanate
from financial stability, personal financial need, financial targets and external pressure.
In addition, CGMA (2012) also argued that the motivation or pressure for fraud is
typically based on greed or need that result from financial difficulties which an
individual will be experiencing. Furthermore, Murdock (2008) also argued that
pressure can be a financial pressure, non-financial, or political and social pressure.
Non-financial pressure can be derived from a lack of personal discipline or other
weaknesses such as gambling habit, drug addiction. While, political and social
pressure occurs when people feel they cannot appear to fail due to their status or
reputation. However, Rae and Subramaniam (2008), concluded that pressure gives
employees some degree of motivation to commit fraud as a result of greed or personal
financial pressure.
Consequently, an opportunity may rise where there are weak internal controls such as poor
security, little fear of exposure or likelihood of detection (Ashraf, 2011). In his study on fraud
occurrence, Cressey (1950) also mentioned that perceived opportunity arises when the
fraudster sees a way to use their position of trust to solve the financial problem, despite the
fact that fraud will be detected. Thus, understanding the opportunity for fraud to occur is
essential to the auditor in matching fraud schemes with internal controls gaps. Thus, internal
controls gap present opportunities for an employee to commit fraud.
Therefore, in each kind of fraud, the three elements of the Fraud Triangle Theory have to be
present, although in varying degree (Mackevičius & Giriūnas, 2013). If the perceived pressure
is huge, then the rationalization does not have to be that intricate. For example, if one has a
lot of pressure to get money in a very short period of time, the perceived pressure holds a
higher degree of influence than the rationalization element. However, if the employee has a
pressure of getting a new and expensive car, then there is need for rationalization. However,
Cressey (1973), who was the first to propose the fraud triangle, explained that the pressure
to commit fraud can be identified with a person’s internal motives, but he stressed that the
presence of financial trouble does not mean that people will be inclined to commit fraud.
Cressey’s fraud theory, normally known as the fraud triangle theory, has been widely
supported and used by audit professionals and standards’ setters as an instrument for
detecting fraud. While Cressey (1950) identified the three elements that are now referred to
as the fraud tringle, it has been noted that the study was limited to funds embezzlement and
not to fraud in general. Although Cressey’s fraud triangle has been supported by audit
regulators, critics such as Albrecht et al. (1984); Wolfe and Hermanson (2004; Kranacher, et
al. in 2010; Dorminey et al.2010) argued that the model alone is an inadequate instrument
for fraud. This has seen the introduction of the Fraud Diamond by Wolfe and Hermanson
(2004) and the Fraud scale theory by Albrecht et al (1984). However, other fraud models
should be regarded as an extension to Cressey’s fraud triangle model.
As provided for by Wolfe and Hermanson (2004) the Fraud diamond has four elements;
thereby adding the capability element to the original fraud triangle. The argument was Wolfe
and Hermanson believed that although the fraudster may have the pressure, opportunity to
commit the fraud and rationalize the ideology of betraying the trust. Yet, he cannot conceal
unless he has the capability to do so. Many opponents of the Fraud triangle claim that the
triangle is not sufficiently detailed because it lacks a crucial element which is capability
(Kassem & Higson 2012; Anandarajan & Kleinman, 2011). Thus, not every person who has the
motivation, opportunities, and realization may decide to commit fraud due to the lack of the
capability to circumvent internal controls. Furthermore, Dorminey, et al. (2010) argued that
the model cannot solve the fraud problem alone because two sides of the fraud triangle,
pressure and rationalization, cannot be easily observed. More importantly, factors like
fraudsters’ capabilities are ignored by the fraud triangle (Higson, 2012).

However, it can be observed that the merging of the components of the fraud theories can
strengthen the knowledge of the external auditors. In fact, it is important for auditors to
consider all fraud models to better understand why fraud is committed. Hence, it is necessary
to have an integrated model that includes motivation, opportunity, integrity, and fraudster’s
capabilities.
3.5.2 The Fraud Diamond theory
Wolf and Hermanson (2004) present the four factors to commit fraud as a diamond. It is
generally viewed as an expanded version of the Fraud Triangle Theory proposed by Cressey
(1953). And many researchers have acknowledged the fraud diamond theory as valuable
framework in understanding the occurrence of fraud (Abayomi, 2016b; Mansor et al., 2015;
Manurung & Hardika, 2015; Ruankaew, 2016).

Figure 2.2: The Fraud Diamond

Source: Abayomi (2016b)
While the fraud triangle has been widely used by many auditing professionals in diagnosing
fraud, a fourth element has been suggested to strengthen the diagnosis process. The fourth
element is the capability which defines the personal qualities and the abilities that seem to
play a major role in fraud commitment. Capability is believed by Wolf and Hermanson (2004)
as a qualitative element that have a significant influence to the fraud commitment. The
proponents of this theory posit that many billion-dollar frauds would not have taken place if
the fraudsters had no right capabilities. In other words, the potential perpetrator must have
the skills and ability to commit fraud (Manurung & Hardika, 2015). Furthermore, Albrecht et
al. (1995) believe that only the person who has an extremely high capacity will be able to
understand the existing internal control, to identify its weaknesses and to use them in
planning the implementation of fraud. Hence, it can be argued from this point of views that
not every person who possessed motivation, opportunities, and realization may commit fraud
due to the lack of the capability to carry it out or to conceal it.

As presented by Manurung and Hadian (2013) the opportunity is the pathway to fraud while
pressure and rationalization can draw the person toward it. However, it can be noted that the
person must have the capability to recognize the pathway and take advantage of it by walking
through it several times. Otherwise, pressure and motivation alone do not sufficiently impose
great effort for fraud to be committed. This claim may be reinforced using the analogy of
playing football. A player may have the opportunity to score a goal, be under pressure or have
the incentive to score and convince himself that scoring a goal is worth doing than not scoring,
but whether the goal will be successfully placed out of the reach of the goal keeper or put
behind the net may be an entirely different matter. Therefore, if the player does not have the
skill he will miss the opportunity. Hence, it is believed that only the person who has an
extremely high capacity will be able to understand the existing internal control, to identify its
weaknesses and to use them in planning the implementation of fraud.

In introducing the fourth element in the fraud diamond, Wolf and Hermanson (2004) believed
that many frauds would not have occurred if the person does not have the right capabilities.
According to Abayomi (2016b), the capability factor has become important because
nowadays fraud is committed by intelligent and creative personnel in the backdrop of solid
internal controls. Therefore, assessing the capability element will assist in the auditors in
detection of fraudulent activity within the firm. Hence, the Fraud Diamond theory was
proposed.

Therefore, extending the fraud triangle theory and using the four elements of the fraud
diamond theory, fraudster is likely to proceed as follows (Aghghaleh et al., 2014); (1) the
person has a need to commit fraud (pressure); (2) fraud is possible because the internal
controls are weak (opportunity); (3) the person has convinced him/herself that it is worth
doing (rationalization); (4) the person has the traits and abilities to exploit the opportunity
(capability). Even if the four elements seem to overlap, the primary contribution of the fraud
diamond theory is that the capability to commit fraud is clearly considered in fraud analysis.
Thereby, moving beyond viewing fraud factors as a triumvirate.

Wolfe and Hermanson (2004) also believed that numerous frauds would not have occurred
without the right person with the right capabilities implementing the details of the fraud.
Mackevicius and Giriunas (2013), also concurred that not every person who possessed
motivation, opportunities, and realization may commit fraud due to the lack of the capability
to carry it out or to conceal it. Therefore, with the additional element presented in the fraud
diamond theory affecting individuals’ decision to commit fraud, the organization and auditors
need to better understand employees’ individual traits and abilities in order to assess the risk
of fraudulent behaviors (Manurung & Hardika, 2015). In addition, better systems of checks
and balances should be implemented and monitored to proactively minimize risks and losses
as a result of fraudulent activities in the workplace. Hence, because of the capability of those
who are engaged in fraud and other forms of mobocracies, the service of a trained and
experienced investigator like the forensic auditor is required to anticipate the occurrence of
fraud.
3. White collar crime theory
White collar crime refers to financially motivated nonviolent crime committed by business
and government professionals (Shaheen, Sultana, & Noor, 2014; Simha, 2016). The crime is
usually committed by those who have power or influence within the organisation. The theory
of White collar crime was propounded by Sutherland (1949) in an attempt to study crime and
society. By introducing the theory Sutherland sought to distinguish crimes associated with
‘respectable’ or legitimate occupations from the ‘ordinary’ crimes such as rape or murder of
high-status individuals, and from professional crimes. He theorized that crime is committed
by a respectable person who also holds a high social status. During his study, he observed that
less than two percent of the persons prisoned yearly belong to the upper class. The study of
the white-collar crime was meant to ascertain that crimes involving money are related to
social status. It can be argued that people steal money in order to improve their social status.
As a result, the higher the status the more likely the person will commit the crime.

In addition, the other contributing factors to white collar crime is the opportunity and the
advent of technology (Wyk, 2012.). New information technologies imply that the opportunity
of wrong doing is advanced and at the same time it can be concealed because not many
individuals and businesses are acquainted with technology. Hence, because of the status of
those who engaged in these mayhems, the services of a trained and experienced investigator
like the forensic auditor is required to envision the occurrence of such fraud.

Furthermore, the work of Dorminey et al. (2012) suggests the creation of an overarching meta
model of white-collar crime by looking beyond the simple fraud triangle and interconnecting
it with various other elements of the crime. Dorminey asserts that the Fraud Triangle alone
may not be enough to capture the behavioral antecedents of white-collar crime. White-collar
crime can be seen as the fusion of both criminology and business. In supporting the theory of
White collar crime, Dorminey concurred with Sutherland that fraud should be treated as a
crime. Although it can be acknowledged that fraud implies that a crime has been committed,
however, it can be observed that it is difficult to view fraud as a criminal act because criminal
law and criminal justice cannot exclusively deal with it. Subsequently, violations of
organizational regulations are often seen as ‘technical’ rather than ‘criminal’ offences. As a
consequence, it can be seen that all wrong doings are not always regarded as criminal
conduct. More so, the information for prosecution is not readily available (Bystrova, 2015).
To establish whether fraud was committed or not, an expert is need. Hence, the white-collar
theory fall short in this regard.

3.5.4. Fraud scale theory

Again, the fraud scale theory was developed by Albrecht, Howe and Romney (1984) as an
alternative to the fraud triangle model. It is very similar to the fraud triangle; however, the
fraud scale uses an element called “personal integrity” instead of rationalization. This
personal integrity element is associated with each individual’s personal code of ethical
behavior. Albrecht et al. also argued that, unlike rationalization in the fraud triangle theory,
personal integrity can be observed in both an individual’s decisions and the decision-making
process, which can help in assessing integrity and determining the likelihood that an individual
will commit fraud. Experts agree that fraud and other unethical behaviors often occur due to
an individual’s lack of personal integrity or other moral reasoning (Dorminey et al., 2010).
Hence, to predict the occurrence of such fraud, the services of a forensic auditor is necessary.

Figure 2.3: Fraud Scale Theory

Source: Albrecht, Howe and Romney (1984)
3.5.5 The Diamond Fraud Theory and the new Fraud Diamond Theory
It is of paramount importance that forensic accounts understand why people committ fraud
in order to develop the measures and techniques of mitigations.the Fraud Triangle theory and
the Fraud Diamond Theory are two theories that would be utitilised by this reasearch.The
fraud triangle theory was developed by Creseey and identified three reasons why employees
commit fraud. Creseey identified three reasons why people commit fraud .These were
identified as opportunity, pressure and rationalisation. Wolf and Hermanson (2004) agrees
with Creseey’s fraud triangle theory but added a fourth variable capabilities. On that frauds
occur because of the existence of a right person with right capabilities implementing the
details of the fraud. The theory observed four traits for committing fraud: a position of
authority within the entity, capacity to understand and exploit accounting systems and
internal control, the confidence that one will not be detected, or get caught, and if caught
one will get out of it easily, and as well as the capability to deal with the stress created .
The theory is important to forensic accountants in that they need to keep it in their minds
that there is pressure or motive to commit fraud. This can either be personal pressure,
employment pressure, or external pressure and each of these types of pressure can also
happen due to financial and nonfinancial pressure. Forensic accountants should understand
the opportunity for committing fraud in order to be able to identify which fraud schemes an
individual can commit and that a fraud virus occurs when there is an ineffective or missing
internal control. The four factors to fraud as presented by (Wolf & Hermanson, 2004) in the
fraud diamond are shown in figure 2.3
Incentive /pressure

Capability opportunity

Rationalisation
Figure 2.3.1 Fraud Diamond Model (Wolf & Hermanson, 2004)
2.3.3 The new Fraud Diamond (NAVSMICE)
The critic to diamond theory argue that although the fraud diamond added the fourth
variable “capability” and filled the gap in other theories of fraud, the model alone is an
inadequate tool for investigating, deterring, preventing and detecting fraud. This is because,
incentive/pressure and rationalization) cannot be observed, and that other important factors
like national value system and corporate governance are not considered. This research
therefore suggests another model that can be termed “New Fraud Diamond. ”that was
designed by (Dorminey, Fleming, & Riley, 2010). The New Fraud diamond model is given in
shown in figure 2.3 .2below;

MOTIVATION

(NAVSMICE MODEL)

CORPERATE

CAPABILITIES OPPOTUNITY

GOVERNANCE

PERSONAL INTEGRITY
Figure 2.3:2 The New Fraud Diamond Model (Wolf & Hermanson, 2004)
In this model ,the motivation factor is expanded and identified with the acronym: NAVSMICE
that stands for NAVS – National Value System; M = Money; I = Ideology; C = Coercion; and E
= Ego. It is important to note that Zimbabwe’s present National Value System is bad . Little or
no importance is put on good behaviour such as honesty, integrity and good character
(Mabika, 2015,Magombedze & Gunduza, 2017) The society does not question the source of
“wealth.” Any person who suddenly gets riches or wealth is quickly recognized , promoted
and honoured. It must be known that fraud exist in society where riches are honoured
without question(KPMG, 2019).The Zimbabwean society is based on wealth (materialistic
society) that to a larger extent promotes fraud (Mawanza, 2014).
The model also suggests that the fraud scale should include personal integrity instead of
rationalization and it is particularly applicable to financial reporting fraud where sources of
pressure (e.g. analysts‟ forecasts, management earnings guidance, a history of sales and
earnings growth) are more observable. Personal integrity can be observable through
observing both a person‟s decisions as well as the decision making process. The person‟s
commitment to ethical decision-making can be observed and this can help in assessing
integrity and thus the likelihood of an individual committing fraud.
The model further suggests corporate governance as the lock to all the factors that cause
fraud to take place in Zimbabwe. An important theme of corporate governance is the nature
and extent of accountability of people in the organizations. Corporate governance is the
principle and value that guides an organization in the conduct of its day-to-day activities and
how stakeholders interrelate among one another (Anandarajah, 2001).Good corporate
governance is the missing link in developing countries, for instance Zimbabwe which has a
high index of fraud occurrence (Jose, 2014).This situation can only change when the country
achieves a positive change in the character and orientation of their government leadership
(Office of the Auditor General, 2018) The leaders can bring this desired change by promoting
good corporate governance in the Zimbabwean economy through integrity, accountability
and transparency, which would lead to attainment of strong internal control system in
developing countries and thus the likelihood of an individual committing fraud. (Nwankwo,
2011).According to financial literature, it is important for forensic accountants to consider all
the fraud models to better understand why fraud occurs and the reasons why frauds are on
the rise. This study suggest that all other fraud models should be regarded as an extension
to Wolf and Hermanson‟s fraud diamond and should be integrated in one model that includes
motivation, opportunity, personal integrity, capabilities and corporate governance. This
should be called “New Fraud Diamond Model.” the New Fraud Diamond Model help
effectively in investigating and assessing fraud risk

3.6 Who commits Fraud?

In view of the principles mentioned, one might conclude that fraud is caused mainly by factors
external to the individual: economic, competitive, social, and political factors, and poor
controls. But how about the individual? Are some people more prone to commit fraud than
others? And if so, is that a more serious cause of fraud than the external and internal
environmental factors previously discussed? Data from criminology and sociology seem to
suggest so. Begin by making a few generalization about people.
• Some people are honest all of the time.
• Some people are dishonest all of the time.
• Most people are honest some of the time.
• Some people are honest most of the time.
Research has been conducted to ask employees whether they are honest at work. Forty
percent say they would not steal, 30 percent said they would, and 30 percent said they might.
Beyond those generalisations about people, what can one say about fraud perpetrators?
Gwynn Nettler, in Lying, Cheating and Stealing, offers these insights on cheaters and
deceivers.
• People who have experienced failure are more likely to cheat.
• People who are disliked and who dislike themselves tend to be more deceitful.
• People who are impulsive, distractible, and unable to postpone gratification are more
likely to engage in deceitful crimes.
• People who have a conscience (fear of apprehension and punishment; that is;
perception of detection) are more resistant to the temptation to deceive.
• Intelligent people tend to be more honest than ignorant people. Middle land upper-
class people tend to be more honest than lower class people. The easier it is o cheat
and steal, the more people will do so.
• Individuals have different needs and therefore different levels at which they will be
sufficiently motivated to lie, cheat, or steal.
• Lying, cheating, and stealing increase when people have great pressure to achieve
important objectives.
• The struggle to survive generates deceit.
People lie, cheat, steal on the job in a variety of personal and organizational situations. The
ways that follow are but a few.
1. Personal variables
• Aptitudes/abilities
• Attitudes/preferences
• Personal needs /wants
• Values / beliefs
2. Organisational variables
• Nature/scope of the job (meaningful work)
• Tools/training provided
• Reward/recognition system
 • Quality of management and supervision
• Clarity of role responsibilities
• Clarity of job-related goals
• Interpersonal trust
• Motivational and ethical climate (ethics and values of superiors and coworkers)
1. External variables
• Degree of competition in the industry
• General economic conditions
• Societal values (ethics of competitors and of social and political role models)
Why Do Employees Lie, Cheat, and Steal on the Job?
These 25 reasons for employee crimes are those most often advanced by authorities in white-
collar crime (criminologists, psychologists, sociologists, risk managers, auditors, police, and
security professionals):
1. The employee believes he can get away with it.
2. The employee thinks she desperately needs or desires the money or articles stolen.
3. The employees feels frustrated or dissatisfied about some aspect of the job.
4. The employee feels frustrated or dissatisfied about some aspect of his personal life that is
not job related.
5. The employee feels abused by the employer and wants to get even.
6. The employee fails to consider the consequences of being caught.
7. The employee thinks: “Everybody else steals, so why not me?”
8. The employee thinks” “They’re so big, stealing a little bit won’t hurt them.”
9. The employee doesn’t know how to manage her own money, so is always broke and ready
to steal.
10. The employee feels that beating the organization is a challenge and not a matter of
economic gain alone.
11. The employee was economically, socially, or culturally deprived during childhood.
12. The employee is compensating for a void felt in his personal life and needs love, affection,
friendship.
13. The employee has no self-control and steals out of compulsion.
14. The employee believes a friend at work has been subjected to humiliation or abuse or
has been treated unfairly.
15. The employee is just plain lazy and will not work hard to earn enough to buy what she
wants or needs.
16. The organisation’s internal controls are so lax that everyone is tempted to steal.
17. No one has ever been prosecuted for stealing from the organization.
18. Most employee thieves are caught by accident rather than by audit or design. Therefore,
fear of being caught is not a deterrent to theft.
19. Employees are not encouraged to discuss personal or financial problems at work or to
seek management’s advice and counsel on such matters.
20. Employee theft is a situational phenomenon. Each theft has its own preceding conditions,
and each thief has her own motives.
21. Employees steal for any reason the human mind and imagination can conjure up.
22. Employees never go to jail or get harsh prison sentences for stealing, defrauding, or
embezzling from their employers.
23. Human beings are weak and prone to sin.
24. Employees today are morally, ethically, and spiritually bankrupt.
25. Employees tend to imitate their bosses. If their bosses steal or cheat, then they are likely
to do it also.
To be respected and thus complied with, laws must be rational, fair in application, and
enforced quickly and efficiently. Company policies that relate to employee honest, like
criminal laws in general, must be rational, fair, and intended to serve the company’s best
economic interests. The test of rationality for any company fraud policy is whether its terms
are understandable, whether its punishments or prohibitions are applicable to a real and
serious matter, and whether its enforcement is possible in an efficient and legally effective
way.
But what specific employee acts are serious enough to be prohibited and or punished? Any
act that could or does result in substantial loss, damage, or destruction of company assets
should be prohibited. What is acceptable or considered substantial will vary by organization,
but wherever the boundaries are defined, they must be well communicated, exemplified by
upper management, and enforced as necessary.
The greatest deterrent to criminal behaviour is sure and even-handed justice; that means
swift detection and apprehension, a speedy and impartial trial, and punishment that fits the
crime: loss of civil rights, privileges, property, personal freedom, or social approval. Having
said all that, why is it that, despite the dire consequences of criminal behavior, it still occurs?
Apparently, it is because the rewards gained often exceed the risk of apprehension and
punishment; that is, the pains inflicted as punishment are not as severe as the pleasures of
criminal behavior. The latter seems to be particularly true in cases of economic or white-collar
crimes. Many times, if not most, when a fraud is detected, the extent of punishment regarding
the perpetrator is to be fired, sometimes without even paying back the fraud losses. So while
potential white-collar criminals may believe they might get caught, the ramifications are
below some acceptable threshold.

High-Level and Low-Level Thieves

At high levels of organizational life, it is easy to steal because controls can be bypassed or
overridden. The sums high-level managers steal, therefore, tend to be greater than the sums
low-level personnel steal. Or instance, according to the 2008 ACFE RTTN, executives average
about 834,000 per fraud, managers about $150 000, and employees about $834,000 per
fraud, managers about $150,000, and employees about $70,000. The number of incidents of
theft, however, is greater at low levels of organisations because of the sheer number of
employees found there.
The ACFE RTTN has put together a profile of fraudsters based on the information collected
from CFEs in its surveys. The more expensive frauds, in terms of cost or losses, are committed
by fraudsters who (a) have been with the firm a long time, (b) earn a high income, (c) are
male, (d) are over 60 years of age, € are well educated (the higher the educational degree
completed, the higher the losses), (f) operate in collusion rather than alone, and (g) have
never been charged with anything criminal. The most frequent frauds, however, are
committed by fraudsters with a different profile. These fraudsters (a) have been an employee
for about the same amount of time as the high-level thieves, (b) earn much less, (c) could be
either male or female (gender doesn’t matter), (d) are between the ages of 41 and 50, (e)
have finished high school, (f) operate alone, (g) and have usually not been charged with any
criminal behavior.
Hall and Singleton provide a similar profile for a typical fraudster in general. These criminals
are (a) in a key position in the company, (b) are usually male, (c) are more than 50 years old,
(d) are married, and € are highly educated. This profile is similar to the one from the ACFE
RTTN, and leads us to this overall conclusion: A white-collar criminal does not look like a
criminal!
3.7 Why do managers commit Fraud

3.8 Activity
1 Explain the nature of fraud and its impact on organisations
2. Define and identify the legal components of fraud.
3. Using some fraud theory write an essay on why employees perpetrate fraud
4. Critically examine the statement that a fraudster can be identified by appearance
and character

3.9 Summery
In this unit we have discussed the nature of fraud and its impact on organisations. We saw
that economic crimes takes many forms in practice. Fraud , as legally defined, is only one form
of economic crime. We have examined the factors and reasons that prompt employees and
managers to perpetrate fraud. We ended by looking at the characteristics of people who are
likely to commit fraud.

Reference
Hopwood, W.S., Leiner J.J., and Young, G.R., (2012). Forensic Accounting and Fraud
examination. 2nded. New York. McGraw-Hill.
J.Thomas W Golden, Steven L Skalak, Mona M Clayton (1807) A guide to Forensic Accounting
and investigations.
Michael A Grain, William s Carl Paani, George R ; Essentials of Forensic Accounting.
Golden, T.W., Skalak, S.L., and Clayton, M.M.,(2006). A guide to Forensic Accounting
Investigation. New Jerseys: John Wiley & Sons Inc.