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Enhancing Deterrence of Economic Crimes
The Association of Certified Fraud Examiners' (ACFE) 2010 Repor ro the Nation www.acfe.com/rttn/rttn-2010.pdf) estimates the cost of fraud to be 5% of businsses annual revenues. Globally, this translates to approximately $2.9 trillion of economic losses due to fraud. In response, antifraud efforts have attracted the attention of a wide group of professionals: internal and external auditors, members of boards of directors and committees, management, and regulators.
To understand why people commit fraud, many professionals refer to the fraud triangle, which was developed in the mid-20th century. The significance of the fraud triangle in understanding motivation and its importance is most evident in Statement on Auditing Standards (SAS) 99, Consideration of Fraud in a Financial Statement Audit, which makes the concept central. Nevertheless, since the 1950s, professionals and academics have offered important insights that have gone beyond the fraud triangle. These extensions have enhanced professionals' ability to prevent, deter, detect, investigate, and remediate fraud. Research beyond the fraud triangle - summarized in Exhibit 1 - can help to better understand this societal phenomenon.
Seminal Efforts in Fraud Research
Much of the current understanding of why perpetrators commit fraud is grounded in the fraud triangle. The concept of a fraud triangle dates back to the work of Edwin Sutherland, who coined the term white-collar crime, and Donald Cressey, who wrote Other People's Money (Patterson Smith, 1973). Cressey, a PhD student of Sutherland in the 1940s, concentrated his research on the circumstances that led fraudsters to initially violate ethical standards and engage in their first fraudulent act. Over the years, his research findings became known as the fraud triangle, whose points represent the causal factors of perceived pressure (or nonshareable financial need), perceived opportunity, and rationalization (Exhibit 2).
Perceived ('Nonshareable') Financial Pressures
As documented in Other People's Money, when Cressey asked individuals who had violated a trust why they had not exploited previous fraud opportunities, those who responded gave one or more of the following reasons:
* "There was no need for it like there was this time."
* "The idea never entered my head."
* "I thought it was dishonest then, but this time it did not seem dishonest at first."
Furthermore, the fraudster had concluded that his financial problem could...