How Can Fraud Occur?

How can fraud occur?

Fraud refers to an intentional act by one or more individuals among management, employees, those charged with governance or third parties, involving the use of deception to obtain an unjust or illegal advantage. Deception here means making someone to believe on something that is not true. Fraud is a type of criminal activity, defined as abuse of position, false representation, or prejudicing someone's rights for personal gain. Fraud is a deliberate misrepresentation that causes a person or business to suffer damages, often in the form of monetary losses through deception or concealment.

The Fraud Diamond explained how fraud schemes are perpetuated. The diamond adds a fourth point to the Fraud Triangle. In addition to the elements of incentive, opportunity, and rationalization, the person’s ability/skill level or capability also cause fraud to happen. In order to pull off a fraud scheme, the person must have certain skills like financial knowledge, skills and abilities of those individuals with an access, or familiarity with computer programs. Four sided of fraud diamond, which incorporates an individual’s capability which is personal traits and abilities play a major role in whether fraud will actually occur given the presence of pressure, opportunity and rationalization. Opportunity opens the doorway to fraud, and incentive; i.e. 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.

Using the four-element of fraud diamond, a person commits fraud when he has incentive, which is a person wants or need to commit fraud. Opportunity to commit fraud happened when there is a weakness in the system that the right person could exploit. Fraud is possible when the perpetrator rationalize the fraud action which is when a person have convinced himself that this fraudulent behavior worth the risks. Lastly, the capability to act is when a person has the necessary traits and abilities to commit fraud. An opportunity for fraud exists, if the right person is in place to understand and exploit it. This opportunity for fraud becomes a much more serious problem if for example, the company's CEO who is under intense pressure to increase sales, has the technical skills to understand that the control weakness exists, can coerce the CFO and sales manager to manipulate the sales contract dates, and can consistently lie to analysts and board members about the company's growth. The right person for a fraud is smart enough to understand and exploit internal control weaknesses and to use position, function, or authorized access to the greatest advantage. Components of capability includes, position/function, brains, confidence/ego, coercion skills, effective