A.B.C.'s of Behavioral Forensics: Applying Psychology to Financial Fraud Prevention and Detection

CHAPTER 3

Beyond the Fraud Triangle

TOWARD AN OUTLINE OF A.B.C. THEORY

Is it the apple, the bushel, or the crop? This is what we often ask ourselves when we learn about alleged fraud involving a staggering amount of money.

As we have discussed, fraud is a human act that often relies heavily on both an individual's emotions and his or her state of mind. For years, scholars and practitioners have attempted to study and understand these behaviors. Much of the extant literature has focused on the idea that greed is the underlying motive for most fraudulent behavior.1 We are going to take this literature one step further by gaining a better understanding of how the behavioral sciences can be utilized to explain fraud.

The Relevance of Behavioral Approaches

One of the forensic accounting “classics” introduced the “iceberg theory” as a way of looking at fraud and enabling its detection. According to this theory, the top one-third of the iceberg (sticking out of the water) involves structural considerations, such as hierarchy, financial resources, organizational goals, personal skills and abilities, technological state, and performance measurement. However, the authors argued that like an observant Internal Revenue Service agent, a forensic accountant should be aware of the lifestyles of the employees, because this may provide clues about the possibility of fraud. According to this theory, fraud auditors should look at the two-thirds of the iceberg below the water. It is below the water ...