What Role Does Human Behaviour Play in Corporate Frauds?

Like the rest of the world, corporate frauds in India have been exacting a devastating toll on the economy, and resulting in the loss of livelihoods. Crises in Jet Airways, Crompton Greaves, and Fortis–Religare are a few among the multitude of corporate downfalls in the recent years. Although regulatory and compliance mechanisms are important to keep a tab on the corporate world, there is a need to look at the human element, the persons who are responsible for such fraudulent behaviour, by bringing in a behavioural approach. 


The rising financial frauds tumbling out of the corporate world have raised questions about the professional and personal integrity of accounting managers. Rather than acting as watchdogs for transparent and fair reporting of financial information, accounting managers and auditors have been observed to play puppets for the unscrupulous managements (Bruynseels and Cardinaels 2014). Such fraudulent practices direct our attention to the unethical behaviour of individuals who are responsible for making companies victims of fraud.  

The Global Economic Crime and Fraud Survey by PricewaterhouseCoopers (2018) reveals that 49% of corporate executives believe that their organisations have been victims of economic crime or fraud, up from 36% in 2016. In organisations, as per 2018 figures, there is almost a 6% increase in the proportion of fraud committed by the internal actors or senior management as against 2016 statistics (Ernst & Young 2018). Between 2012 and 2018, over $11 billion worth fines were collected globally by the United Kingdom Serious Fraud Office and the United States Department of Justice under the Foreign Corrupt Practices Act (Ernst & Young 2018). 

The situation is equally alarming in India, as it continues to rank among the most corrupt nations of the world (Desai 2018). As per the Reserve Bank of India (RBI), 6,801 fraud cases, worth Rs 71,542.93 crore, were reported in the country in the 2018–19 financial year compared to 5,916 cases in 2017–18 fiscal, amounting to the loss of Rs 41,167.04 crore. This is a whopping 73.8% increase in terms of banking fraud (Shrivastava 2019). 

In 2019, India was in the grip of corporate downfalls, from the Jet Airways crisis, Fortis–Religare fraud, suicide of Café Coffee Day’s founder, Punjab and Maharashtra Cooperative (PMC) Bank fraud to the most recent ones that hit the headlines in the form of Crompton Greaves power and Infosys fraud. All these cases direct our attention towards the unethical practices employed by the senior management, including chief financial officers (CFOs), directors, and other executives of the company, to manipulate the book of accounts to deceive investors, shareholders, and the public at large. In the Crompton Greaves power fraud case, it has been revealed that some employees, to boost the revenue and short-term profits, have manipulated the financial statements of the firm to understate liabilities by Rs 1,608.07 crore (Sharma 2019). Following the preliminary inspection into the diversion of funds and misstating of financial statements, the Ministry of Corporate Affairs (MCA), in November 2019, assigned the case to the Serious Fraud Investigation Office (SFIO) for further investigation (Sharma 2019).

On similar grounds, the Infosys fraud case is another example of aggressive accounting and unethical practices employed by the senior management. It has been accused of instructing its employees to not recognise visa costs in the books. It has also been alleged that the management exerted pressure on the employees to not share any key information about the large deals with the board and the auditors, and has asked them to change the investment policy and make wrong assumptions to show accounting margins (Mendonca and Pramanik 2019). 

The alleged dishonest accounting practices employed by Crompton Greaves and Infosys are still under investigation, and will they turn out to be full-blown accounting scandals or not, only time will time. However, these cases, along with other frauds, have raised some crucial questions on the functioning of the regulatory and corporate governance mechanisms in India, including the compliance with whistle-blowing policy, the role of board of directors and auditors in detecting the grey areas, and most importantly, the ethical behaviour and integrity of employees involved in these frauds. The unending saga of corporate frauds that has been affecting the Indian economy thus demands immediate attention towards the systemic deficiencies plaguing the corporate world with a fresh perspective. 

Fraud is “[an] unfortunate consequence of a multitude of mostly behavioural factors that drives otherwise honest people to do dishonest things” (Ramamoorti and Olsen 2007: 54). Joseph Wells, the founder and the chairman of the Association of Certified Fraud Examiners (ACFE), reminds the world that “fraud is committed by people, not numbers” (Stein 2015). However, to mitigate the risk of frauds, stringent regulatory and governance mechanisms, better risk-compliance programmes, and anti-fraud tools and strategies have been brought to the fore. No doubt these mechanisms are important, but they only provide a partial solution to the larger problem. One needs to understand that there is something vital that has been still missing in our fight against corporate frauds, and the corporate world has become wilfully blind towards the central element of frauds in the form of  “humans” (Ramamoorti and Olsen 2007). 

Fraud is a multifaceted issue, and it requires us to pivot our attention towards considering human behaviour as an important fraud-risk factor. This is because human behaviour is malleable and dynamic, and not a stable trait that characterises individuals. We believe that the understanding of the underlying behavioural dynamics of perpetrators of frauds in terms of their psychological and personality traits and the forces that lead individuals, consciously or unconsciously, cross ethical boundaries can give us a fresh perspective for fraud detection, and can help find an answer to why individuals rationalise a fraudulent behaviour (Ramamoorti 2008). Therefore, the two dimensions related to humans, basically human behaviour and human personality, can help us in the conceptualisation of underlying factors. Such an understanding will provide some practical value to regulators in the government and corporate world, and helps them in devising tools for fraud detection and deterrence. 

Root Causes of Fraud: A Behavioural Approach

The fraud triangle conception, developed by criminologist Donald R Cressey, has been helping fraud examiners for several years in understanding why individuals engage in fraud. Fraud examiners, including the regulators, government, accountants, criminologists, auditors, and organisations have used three principle elements of the fraud triangle⁠—incentives/pressure to perform, perceived opportunity, and the rationalisation of the fraudulent behaviour⁠—to empower their examination and to understand the factors contributing to the fraud.  The conception of the fraud triangle has stood the test of time, and has been providing a powerful conceptual framework for fraud detection and prevention. However, Cressey has not been able to provide an explanation as to why individuals rationalise their fraudulent behaviour? Or, what are the forces that drive individuals to rationalise or commit fraud?

The rationalisation corner of the fraud triangle holds very important information for fraud detection and is, probably, the most difficult one to measure. This is because rationalisation of behaviour is based on individual cognition and is, therefore, internal in nature. Often, good organisations, auditors, and regulators do is to make inferences about the rationalisation of behaviour that brings us to the crucial question: How to identify the underlying behavioural elements related to the rationalisation of fraudulent behaviour? 

The tendency to rationalise fraudulent behaviour, or to deceive others, may be suppressed or hidden in one’s own behaviour and personality traits. How an individual responds to malevolent behaviour depends on from whom and from where they have acquired the traits, the circumstances of the situation around them, and most pertinently, on the character and the psychological reflexes of the person. Therefore, to identify the elements related to the rationalisation of fraudulent behaviour, psychological explanations should be sought. To understand human psychology, fraud examiners can draw inferences from the theory of planned behaviour (TPB) and dark triads of personality theory as they can provide vital information about behaviour and personality factors that lead individuals, consciously or unconsciously, to cross ethical boundaries.

TPB is the most viable and compelling theory used across domains to study factors that influence human behaviour (Ajzen 1988). As per this theory, the behaviour of an individual is attributed to their intentions, which are in turn influenced by attitude towards behaviour, subjective norms, perceived behavioural control, and moral obligation. Attitude towards behaviour refers to an individual’s beliefs (likes and dislikes) towards engaging in fraudulent behaviour, based on their evaluation of the (favourable or unfavourable) outcome to engage in duplicitous behaviour. Subjective norms reflect the social pressure of important people (family/friends/loved ones) on an individual’s perceptions as to whether or not to engage in fraudulent behaviour. If people in an individual’s close circle support the decision to commit fraud, a person is most likely expected to indulge in fraudulent behaviour. Perceived behaviour control refers to an individual’s perception of ease or difficulty involved in committing fraud. Moral obligation, on the other hand, reflects a person’s sense of responsibility towards organisation, investors, shareholders, and public at large. 

While engaging in fraud, along with the behaviour, individuals may also use their personality as a tool to win the confidence of their victims (Epstein and Ramamoorti 2016). Much more problematic are fraudsters whose intentions reflect the virulent mix of behaviour and personality traits, including grandiose perception of oneself, lack of empathy for others, the need for power and prestige, sense of entitlement, cynical disregard for morality, a propensity to cheat, lie, deceive, and manipulate, inability to develop social or emotional connect with others, and a belief in a view that considers others just as means to an end (Epstein and Ramamoorti 2016). It has been observed that persons with the aforementioned traits are more often than not involved in fraud. 

To identify these traits, fraud examiners can look at the “dark triads of personality,” namely Machiavellianism, narcissism, and psychopathy in personality science (Paulhus and Williams 2002). Individuals with Machiavellianism, narcissism, and psychopathic personality generally possess behaviour discussed above, such as high levels of impulsivity, anti-social behaviour, low level of empathy, grandiose perception of oneself, and a propensity to cheat, lie, deceive, and manipulate. The three dark triad personality types enable fraud examiners to understand why some people are fraud perpetrators inherently or become predators, “persons who consciously seek out opportunities to commit fraud, often in serial fashion” (Epstein and Ramamoorti 2016: 17). Therefore, studying and understanding the aforementioned “dark triad of personality” types could be an indispensable tool in spotting the likely fraudsters.

TPB and dark triads of personality encompass behaviour and personality factors that provide a wealth of information to fraud examiners about why individuals rationalise fraudulent behaviour. Nowhere these behaviour and personality factors converge more relevantly than in the rationalisation corner of the fraud triangle. Together, these behaviour and personality elements along with the other two elements of the fraud triangle—management incentives/pressure and opportunities to engage in a fraud—play an important role in adequately capturing the true risk of fraud, and they give a new direction to fraud detection and deterrence. 

Combating Corporate Frauds 

It is difficult to contain the spread of contagion. Hence, it is time to introspect if the present governance and regulatory mechanisms and organisational controls are enough to combat bad intentions of the fraudster. Will such mechanisms be able to reveal the mystery of malicious intentions and thought processes of fraud perpetrators? It is necessary to think beyond the existing controls to combat intentions to defraud. Therefore, we suggest a way forward to tackle financial frauds in India and even across the world. 

The surface appeal is clear. An apparent solution to the growing number of frauds in India and across the world is to refrain from being wilfully blinded towards the central actors of fraud in the form of “humans.” Numerous frauds point towards a systemic deficiency in the governance system—undervaluing the human side of governance. To move forward in the fight against fraud, it is high time that fraud examiners, including regulators, get the human side of governance right, that is the behavioural aspect of fraud must be understood. This will help regulators to formulate new procedures, policies, and guidelines for fraud detection and deterrence, which encompass all aspects of fraud.

Further, to understand the human psychology that goes behind a fraud, regulators should also include trained professional psychologists in their teams who can discover the ill intentions of fraud perpetrators, which otherwise may not be possible to capture with the given regulatory mechanisms. The psychologists, along with the regulatory teams, can hold meetings with the top management and board of directors of regulated entities. Such interactions will enable psychologists to read the fraudulent pulse. This will be useful for regulators to develop “psychological red flags” for organisations, auditors, and fraud examiners who can predict fraudulent behaviour. 

The increasing number of frauds also highlights the need for improvement in the fraud-risk assessment tools and professional fraud detection standards. The fraud-risk assessment tools are generally “people neutral,” that is, they are indifferent to the behavioural and personality characteristics of individuals who indulge in frauds, and thereby, inadequately captures the true risk of fraud. We suggest that regulators should consider incorporating or integrating behaviour and personality factors in fraud-risk assessment tools and official auditing standards to enhance auditors’ ability and efficiency in detecting unethical behaviour associated with frauds. 

Apart from this, to reduce the risk of fraud, organisations have developed anti-fraud tools or technology-driven controls that focus on reducing the opportunity or incentives to commit fraud. Unfortunately, organisations are putting significantly less effort in controlling the rationalisation of fraudulent behaviour, which is one of the reasons why frauds continue to take place. Therefore, we suggest that the first step in preventing rationalisation of fraudulent behaviour is to focus on the organisational culture. An organisation should establish a culture of fighting fraud by imbibing openness and honesty with a top-down approach, as a lack of integrity can be contagious. Moreover, organisations should have regular anti-fraud training programmes for its employees to train them to understand the behavioural warning signs of frauds, and what constitutes unethical behaviour and why, making it harder to rationalise a fraudulent behaviour. Additionally, given the complexity in understanding fraudulent behaviour, organisations should develop a multidisciplinary audit team comprising not only professionals in accounting, auditing, law, statistics, and taxation but also professionals from psychology and criminology, as it is vital to have multiple eyes to catch the fraudulent pulse. The audit team should have regular as well as non-scheduled internal audits, and should act as a critical line of defence in alerting the board of any suspicious risk that warrants attention. Organisations should also have an established anonymous reporting system or functioning whistle-blowing policy in place to report suspicious behaviour by fellow employees.

Last but not the least, the Indian banking regulatory authority, RBI, to save the interest of the depositors, needs to have a functioning whistle-blower policy in place. If PMC and PNB banks had a functioning whistle-blower policy, the fraudulent practices could have come to light much earlier, saving the Indian economy from the loss of thousands of crores.  

Thus, to put an end to ever-increasing incidents of frauds in India and across the world, there is a need to recognise the importance of human elements (human behaviour and human personality) in detecting and addressing frauds, coupled with a sophisticated regulatory and governance control mechanisms, functioning whistle-blower policy, better risk compliance programmes, and anti-fraud tools. 

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