No business is immune to fraud. Even if you’ve built a robust control environment, your business could be vulnerable to threats. This is especially true in times of economic uncertainty.
As the economy becomes more unpredictable, fraud risk increases, which makes 2025 a great time to review your fraud prevention techniques. When assessing and addressing fraud risk, we recommend first gaining an understanding of what you’re up against.
Why do people commit fraud?
The most widely accepted hypothesis on why otherwise trustworthy people commit fraud can be described using a model known as the “fraud triangle.” The fraud triangle was inspired by the works of criminologist Donald R. Cressey. Dr. Cressey began building this model in the 1950s, and today it’s the most commonly accepted methodology by fraud experts and criminologists.
The fraud triangle has three components: pressure, rationalization, and opportunity. Under the fraud triangle model, if all three are present, a person is likely to commit fraud.
1. Pressure
The individual is experiencing financial pressures that lead them to consider fraud. This could include:
- Not having enough money to meet basic needs (rent, food, education costs, etc.)
- Feeling pressure to maintain a certain lifestyle
- Having a financial emergency (their car breaks down, they have a costly medical emergency, a family member needs financial assistance, government assistance is withdrawn, etc.)
- Wanting to meet performance expectations at work
2. Rationalization
The person can rationalize the fraudulent act to themselves. A few common phrases for justifying committing fraud could be:
- “My boss doesn’t appreciate me, so why would I care about the company?”
- “The company makes so much money. They don’t even need this.”
- “I’m not the only one doing it.”
- “I work hard. I deserve this.”
- “I’m just borrowing it. I’ll put the money back next week.”
- “The shareholders expect certain results. I will fix it next period.”
3. Opportunity
The circumstances create an opportunity for fraud to occur or for a fraud scheme to go undetected. This could be because of:
- Lack of internal controls
- The ability to override internal controls
- Someone with access to the financials has a close relationship with a related party
- Insufficient oversight
- Inadequate accounting or reporting policies
- Poor tone at the top
What fraudster characteristics should you look out for?
Now that you understand what motivates someone to commit fraud, you can move onto understanding more about the fraudster as a person. Although anyone can commit fraud, people in certain demographics are more likely to get involved in a fraud scheme.
The Association of Certified Fraud Examiners (ACFE) released a 2024 report on the costs and effects of occupational fraud. Below are a few of their findings on fraudster characteristics.
Criminal Background
Interesting, most fraud schemes are perpetrated by individuals without a criminal background. According to a 2024 report from the Association of Certified Fraud Examiners (ACFE), only 12% of fraudsters have been charged with or convicted of a crime. However, many fraudsters have committed fraud at previous employers. Typically, these employers will try to deal with the fraudster by asking for restitution and not pursuing legal action due to the negative attention from such a case. Therefore, a fraudster can get hired by another employer and potentially perpetrate fraud there as well.
Gender
Fraudsters are much more likely to be male, at a three to one ratio. Male fraudsters also account for higher losses. This was true whether the fraudster was an employee or was in a position of authority.
Source: Occupational Fraud 2024: A Report to the Nations. Copyright 2024 by the Association of Certified Fraud Examiners, Inc.
Education Level
Two thirds of those who committed occupational fraud had advanced degrees, and compared to their less-educated counterparts, their fraud schemes were twice as costly.
Age
53% of perpetrators were between the ages of 36 and 50. Although most fraudsters tend to be middle age, the losses become larger the older the fraudster gets. While only 3% of cases were perpetrated by someone greater than 60 years old, the average median loss of fraud perpetrated by that group was $675,000, while the next impactful age bracket — age 56 to 60 — generated a median loss of only $400,000.
Red Flags
Although these characteristics are helpful, it’s important to know that anyone can commit fraud. The ACFE collected a list of red flag behaviors that could indicate someone is involved in a fraud scheme. Some of these red flags are:
- Living beyond their means
- Having financial difficulties
- An unusually close association with a vendor or a customer
- Being unwilling to share their duties or relinquish control of a process
- Irritability, defensiveness, or acting suspiciously
- Having a “wheeler-dealer” attitude
- Bullying or intimidation
- Going through a divorce or having other family problems
What can you do to prevent fraud?
Occupational fraud is something every business leader needs to consider. Once you understand (1) what occupational fraud is, (2) what motivates people to commit fraud, and (3) what characteristics and signs to watch out for, you can take steps to prevent it from happening in the first place. We take a deep dive into some common fraud prevention techniques here, but if you’re concerned about your fraud risk, we encourage you to seek help. Our LaPorte Forensics team can help you build fraud detection techniques and design internal controls to help you better manage your fraud risk. Contact LaPorte Director Elisa Annelin, CPA/CFF, CFE, MPA, MA, for more information.