Most people would agree that stealing is wrong. However, in 2013, organizations around the world lost an estimated $3.7 trillion to fraud. This includes crimes like embezzlement, pyramid schemes, and false insurance claims. Surprisingly, it’s not just a few bad apples causing this problem; many people find themselves tempted to commit fraud and even manage to convince themselves that what they’re doing isn’t wrong.
So, why does fraud occur? While individual reasons may vary, the fraud triangle, a concept developed by criminologist Donald Cressey, explains three key conditions that make fraud likely: pressure, opportunity, and rationalization.
Pressure is often the driving force behind fraudulent behavior. This pressure can come from personal debt, addiction, job-related targets, unexpected job loss, or family illness. These pressures can push individuals to consider unethical actions.
Opportunity arises when people have access to resources that allow them to commit and hide fraud. This could be through corporate credit cards or control over budgets. When pressure combines with these opportunities, the temptation to commit fraud can become overwhelming.
Even with pressure and opportunity, most people need to rationalize their actions to commit fraud. Many fraudsters are first-time offenders who justify their actions to themselves. Some might feel they deserve the money because they are underpaid or overworked, while others might believe their actions are harmless, thinking they will repay the money later.
Some types of fraud might not even seem like fraud to those committing them. Examples include employees altering time sheets or expense reports, taxpayers not reporting cash earnings, or service providers overbilling insurance companies. Although these actions might seem minor and involve small amounts, they contribute to a larger problem.
On a larger scale, consider the case of an Italian dairy company that went bankrupt in 2003 after it was discovered that it had fabricated a $4 billion bank account and falsified financial statements to hide losses. Due to family control, corporate governance and regulatory oversight were weak, and the company likely hoped to recover its losses before being caught.
Fraud isn’t limited to corporate greed; governments and non-profits are also vulnerable. For example, a city official embezzled over $53 million to fund a lavish lifestyle. She had complete control over city finances, allowing her to divert funds for personal use, and her scheme went unnoticed for 20 years. She likely felt entitled to her lifestyle due to her position and the recognition she brought to the city.
It’s easy to think of fraud as a victimless crime because corporations and institutions aren’t individuals. However, fraud affects real people. Employees lose jobs, citizens see their taxes misused, and customers face higher prices to cover losses. Sometimes the effects are clear and devastating, like in the case of Bernie Madoff, who caused thousands to lose their life savings. Often, though, the consequences are subtle and complex, but someone, somewhere, is left to bear the cost.
Engage in a role-playing activity where you and your classmates simulate a workplace environment. Each group will be given a scenario involving potential fraud. Discuss and act out how pressure, opportunity, and rationalization might influence someone to commit fraud. Reflect on how these factors could be mitigated to prevent unethical behavior.
Analyze real-world fraud cases, such as the Italian dairy company or the city official mentioned in the article. Work in groups to identify the elements of the fraud triangle present in each case. Present your findings to the class, focusing on how the fraud could have been prevented and the impact it had on stakeholders.
Participate in a classroom debate on the topic of rationalization in fraud. Divide into two teams: one defending the idea that rationalization is a significant factor in fraud, and the other arguing that it is not. Use examples from the article and other sources to support your arguments. Conclude with a class discussion on how to address rationalization in preventing fraud.
Write a short story from the perspective of a person who is tempted to commit fraud. Incorporate the elements of the fraud triangle—pressure, opportunity, and rationalization—into your narrative. Share your story with the class and discuss the moral and ethical dilemmas faced by your character.
Design and conduct a workshop focused on strategies to prevent fraud in organizations. Work in groups to create presentations on topics such as improving corporate governance, enhancing regulatory oversight, and fostering ethical workplace cultures. Present your workshop to the class, highlighting practical steps that can be taken to reduce fraud risk.
Here’s a sanitized version of the provided YouTube transcript:
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If you ask people whether they think stealing is wrong, most would answer, “Yes.” Yet, in 2013, organizations worldwide lost an estimated total of $3.7 trillion to fraud, which includes crimes like embezzlement, pyramid schemes, and false insurance claims. This issue isn’t just the work of a few individuals; many people are susceptible not only to the temptation to commit fraud but also to convincing themselves that they’ve done nothing wrong.
So, why does fraud happen? While individual motivations may differ, the fraud triangle—a model developed by criminologist Donald Cressey—highlights three conditions that make fraud likely: pressure, opportunity, and rationalization.
Pressure often motivates someone to engage in fraud. This could stem from personal debt, addiction, job-related quotas, sudden job loss, or family illness. Opportunity arises when individuals, in both public and private sectors, have access to tools that enable them to commit and conceal fraud, such as corporate credit cards or control over budgets. The combination of pressure and daily exposure to such opportunities can create a strong temptation.
However, even with these two elements, most fraud still requires rationalization. Many fraudsters are first-time offenders who need to justify their actions to themselves. Some may feel entitled to the money due to feeling underpaid or overworked, while others may believe their actions are victimless, perhaps planning to return the money once their situation improves.
Some common types of fraud may not even register as such to the perpetrator. Examples include employees altering time sheets or expense reports, taxpayers not reporting cash earnings, or service providers overbilling insurance companies. Although these actions may seem minor and sometimes involve only small amounts, they contribute to a larger issue.
On a larger scale, in 2003, the Italian dairy company Parmalat went bankrupt after it was discovered that it had fabricated a $4 billion bank account and falsified financial statements to hide losses from its subsidiaries. Due to family control, corporate governance and regulatory oversight were challenging, and the company likely hoped to recover losses before detection.
Fraud isn’t limited to corporate greed; governments and non-profits are also at risk. For instance, during her time as City Comptroller for Dixon, Illinois, Rita Crundwell embezzled over $53 million. As a leading quarter horse breeder, the costs of maintaining her herd amounted to $200,000 per month. With complete control over city finances, she was able to divert funds for personal expenses, and her scheme went unnoticed for 20 years. It is believed that Crundwell felt entitled to a lavish lifestyle due to her position and the recognition her achievements brought to the city.
It’s easy to view fraud as a victimless crime because corporations and institutions aren’t individuals. However, fraud impacts real people in nearly every case: employees of Parmalat who lost their jobs, citizens of Dixon whose taxes supported horse breeding, and customers of companies that raise prices to cover losses. Sometimes the effects are clear and devastating, as seen in the case of Bernie Madoff, who caused thousands to lose their life savings. Often, though, the consequences are subtle and complex. Yet, someone, somewhere is left to bear the cost.
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This version maintains the core message while removing specific names and sensitive details.
Fraud – Fraud is the wrongful or criminal deception intended to result in financial or personal gain. – The company faced a major scandal when it was discovered that the CEO had committed fraud by falsifying financial statements.
Rationalization – Rationalization is the cognitive process of making something seem consistent with or based on reason, often used to justify actions or beliefs. – Despite knowing it was wrong, he used rationalization to justify his unethical behavior in the workplace.
Pressure – Pressure is the use of persuasion, influence, or intimidation to make someone do something. – The pressure to conform to societal norms can significantly impact an individual’s decision-making process.
Opportunity – Opportunity refers to a set of circumstances that makes it possible to do something. – The lack of oversight in the financial department created an opportunity for embezzlement.
Embezzlement – Embezzlement is the act of withholding assets for the purpose of theft by someone who is in a position of trust. – The accountant was charged with embezzlement after it was discovered that he had been siphoning funds from the company for years.
Behavior – Behavior is the way in which one acts or conducts oneself, especially towards others. – In psychology, understanding human behavior is crucial for developing effective therapeutic interventions.
Ethics – Ethics are moral principles that govern a person’s behavior or the conducting of an activity. – The study of ethics in social studies helps students understand the importance of integrity and moral decision-making in society.
Consequences – Consequences are the results or effects of an action or condition. – The consequences of violating ethical standards can include legal action and damage to one’s reputation.
Psychology – Psychology is the scientific study of the human mind and its functions, especially those affecting behavior in a given context. – By studying psychology, students can gain insights into how cognitive processes influence social interactions.
Governance – Governance refers to the processes and structures used to direct and manage an organization or society. – Effective governance is essential for maintaining order and ensuring that the needs of the population are met.
