[Music] Dr. Richard Riley, PhD: As described previously, the actions of some fraud and financial crime perpetrators are more closely aligned with the behavior of a predator. In this real world example, a 10 year old boy is strangled by his father for life insurance money and is left on the side of the road near a lake. To cover up the murder, the father starts a fire in his home and blames his son for accidentally starting that fire. The murder and the fire allowed the father to collect insurance proceeds The scheme was perpetrated to repay the father's most recent employer for restitution for a fraud that he had committed. What the employer did not know is that this incident was the third time the father had perpetrated a fraud. In the prior instances, previous employers had quietly terminated the man after discovering the defalcation. The choices made by each of his former employers allowed the perpetrator to quietly move on to his next victim and in this scenario, eventually create the ultimate victim, his own son. The father was a predator. The predator seeks out organizations where he or she can start the scheme almost immediately upon being hired. At some point, the accidental fraudster, if not caught early, moves from the behavior characterized by the accidental fraudster. Research by Dorminey et al asserts that most fraud literature fails to recognize predators focused on deliberate and malicious criminal activities. Yet concerns for auditors and practitioners are warranted. Predators are likely better organized, perhaps more capable, have more complex concealment schemes, and are better prepared to deal with auditors and other oversight mechanisms. Finally, because the central focus of the predator's opportunity, risk assessments centered on pressure and rationalization, hallmarks of the fraud triangle, SAS 99. and auditing standards is unlikely to identify predator schemes. Now that we've expanded beyond the fraud triangle, we will explore other fraudster attributes. The fraud scale was developed through an analysis of 212 frauds in the early 1980s. Based on the results of their study, Steve Albrecht and his colleagues proposed relying on two components of the fraud triangle, pressure and opportunity, but replacing rationalization with personal integrity, an attribute that may be observable for past behaviors. For example, if you see persons whose ethical decisions and actions are not what you believe they should be, maybe that person would also consider perpetrating a fraud. Operationalizing the fraud scale, the degree of fraud risk is determined by jointly considering three criteria; pressure, opportunity, and integrity. For example, in this illustration everything is in balance and the fraud risk is neutral but when situational pressures and perceived opportunities are high and personal integrity is low, then fraud is more likely to occur than when the opposite is true. With regard to the fraud triangle, personal integrity affects the probability that an individual may rationalize inappropriate behavior. For example, persons with greater integrity would be less likely to form rationalizations for justifying inappropriate behavior. From that perspective, integrity is a refinement of the rationalization construct as presented in the fraud triangle. Around 2004, Wolfe and Hermansen argued that the fraud triangle could be enhanced to improve both fraud prevention and detection by considering a fourth element, capability. In addition to addressing incentive and opportunity, and then the rationalization, the author's four sided fraud diamond gives consideration to an individual's capability which is described as an individual's personal traits and abilities that play a major role in whether a fraud may actually occur. The authors examine evidence that suggests that many frauds, especially some of the multi billion dollar ones, would not have occurred without perpetrators having the right capabilities. As described by Wolfe and Hermansen, opportunity opens the door to fraud. Incentives and rationalizations draw the fraudster closer to the door, but the fraudster must have the capability to recognize the opportunity to walk through that door to commit the fraudulent act and cancel it. The essential traits thought necessary for committing fraud especially for large sums over long prose of time include a combination of intelligence, position, ego, and the ability to deal well with stress. The person's position or function within the organization may furnish the ability to create or exploit an opportunity for fraud. The largest frauds are committed by intelligent, experienced, and creative people with a solid grasp of company controls and vulnerabilities. This knowledge is leveraged to use the person's over or authorized access to systems or assets. This type of person has a strong ego and great confidence that he or she will not be detected or the belief that they could easily talk themselves out of trouble if caught. In the context of the fraud triangle, capability modifies opportunity by limiting opportunity to a small set of individuals thought to have the necessary capability. Thus capability likely affects the probability that an individual will be able to exploit opportunities in the controled environment of the organization. In addition to an examinations of the theories centered on the white collar criminal, the actor, we extend our discussion to include the characteristics of the white collar crime, the action. A corollary to the fraud triangle is the lesser known triangle of fraud action sometimes referred to as the elements of fraud. While the fraud triangle identifies conditions under which fraud may occur. The Triangle of Fraud Action describes the actions that the individual must perform to perpetrate the fraud. The three components of the Triangle of Fraud Action are the act, concealment, and conversion. The act represents the execution and methodology of the fraud, such as embezzlement, check kiting, or material fraudulent financial reporting. Concealment represents hiding the fraud act. Examples of concealment include creating false journal entries, falsifying bank reconciliations, or destroying files. Conversion is the process of turning ill gotten gains into something usable by the perpetrator in a way that appears to be legitimate. Examples include money laundering, cars, or homes. Evidence of the act concealment and conversion can be collected and presented during adjudication. Further, when considered in total, the triangle of fraud action makes it difficult for the perpetrator to argue that the act was accidental or to deny his or her role in the act. Evidence of concealment in particular provides a compelling argument that the act was intentional. We put all of this together in what is known as the Dorminey et al Meta Model. First the model identifies the pre fraud state of nature as perceived by the perpetrator, the left hand side depicting the fraud triangle. The model characterizes the perpetrator as the initial decision maker, the one who must examine his or her personal and professional situation as well as deterrence prevention and detection fabric in place to determine if a fraudulent act can be successful in both execution and concealment. Moving to the far right, the model examines the post fraud state and focuses on the specific elements of the fraud or the financial crime. The criminal act, the efforts to conceal the act, and an identification of what and how benefits accrue to the perpetrator. Between the perpetrator and the criminal act are the organizational and societal interventions such as internal controls, broader elements of corporate governance, legal and regulatory environment, and other prevention techniques aimed at producing the incidence and impact of the fraudulent acts. These interventions have been characterized by deterrence, prevention, and the perception of detection. Each of these is at least partially outside the control of the perpetrator yet they influence the perpetrator's assessment of the probability of success in terms of completing 164
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and concealing the criminal act.
