Fraud is any illegal, unethical, and/or deceptive action taken by a company or individual for purposes of corporate or personal gain. No matter how large or small a company is, fraud is a possibility. Fraud is often pursued through a scheme or formula that aren’t always easy to spot. 

Sometimes, it can take months for a forensic accountant or private investigator Toronto to locate the fraudulent activity. As we seek to understand why this happens, here are the most common causes of fraud in companies:

Cause #1: Avoid Financial Ruin

Many causes of fraud in companies are related to finances. At its extreme, this may be a corporation trying to protect itself from declaring bankruptcy and permanent closure. It can also be an attempt to avoid the damages that accompany a failed operations strategy.

Cause #2: Too Much Pressure

Strong pressure on performance and unrealistic job expectations may cause of fraud in companies. For example, Wells Fargo had excessively high sales quotas on employees and so employees started to open fake accounts to meet these quotas.

This inflated profits and stock prices but when it was found out, Wells Fargo had to pay billions in fines and lost many, many customers who had fake accounts opened in their name. All of this stems from unrealistic performance expectations.

Cause #3: To Meet Personal Financial Objectives

A cause of fraud in companies is the desire of an employee or executive to meet their own financial obligations. They may simply need more money than they have and a way to get it comes through their associations to a corporation.

The subsequent schemes can range from skimming profits and misappropriating funds to stealing and re-selling merchandise.

Cause #4: Maintain A Management-Level Position

Fraud is sometimes – though not always – perpetrated by those at the executive level. An executive may be concerned, due to a corporation’s performance, their job security is at risk.

In order to protect themselves, they may engage in fraudulent activity to present a more positive performance from themselves, their department, or the corporation as a whole.

Cause #5: Defective Products

A corporation may spend millions of dollars in crafting a product only to find out they are improperly made, defective in some way, or dangerous. The result is a loss of that investment and/or consumers returning the product to your corporation and demanding refunds.

The subsequent fraud that takes place is to cover the losses associated with failed product development or a failed launch.

Cause #6: Lack of Customer Response

Sometimes, customers just aren’t buying what you’re selling. If you aren’t seeing the same customer response to products, some corporations have taken it on them to fraudulent create sales and literally invest customers out of thin air.

The result is a view that a company is healthier than it is, resulting in more investment. Once the truth is found out, the fines and damages are steep.

Cause #7: Weak Internal Controls

Weak internal controls can contribute to the causes of fraud in companies. This includes an unclear separation of duties, lack of supervision, and poor documentation of processes. Combining this lack of oversight with any of the other causes on this list or the identification of opportunity and the likelihood of fraud being committed skyrockets.

Cause #8: Dissatisfaction From An Employee Perspective

When an employee feels dissatisfied, unhappy, or disrespected in their place of work, the opportunity to commit fraud suddenly becomes all the more attractive. This can involve stealing merchandise or money.

Although almost no employee takes a job specifically to commit occupational fraud, there’s always opportunity and in one’s dissatisfaction, fraud is more desirable.

Cause #9: Peer Pressure or Cultural Influences

It may already be a part of the culture at a corporation to commit fraud. There may be other stakeholders at a management level who aren’t interested in ethics, integrity, and honesty, and will pressure others to follow suit.

Although this is increasingly rare these days, peer pressure continues to be a source of mismanagement and fraudulent activity.

Cause #10: To Attract And Keep Investors

Public companies or corporations that are being funded through outside investors may be required to submit routine reports outlining their financial viability. In an effort to keep a corporation going or to attract new investors, fraud may be committed to present more profitability than what is.

Cause #11: To Feed An Addiction

An addiction can take many forms. It could be a gambling, drug, alcohol, or sex addiction. It, alternatively, could be an addiction to a lifestyle. When one is addicted to something and it’s threatened, this gives them the incentive to commit fraud.

This isn’t to say that an addiction automatically means a person will commit fraud. This is only to say that when there’s an unexpected need for money required to continue with one’s addiction, the risk is there.

Cause #12: Rationalization

Rationalization is only a cause of fraud in companies because some interpret it as permission. Thoughts such as ‘I deserve it’, ‘It’s not going to hurt anyone’, ‘They won’t even notice’, or ‘The company can afford it’ are all justifications for participating in illegal activity.