New Fraud Star Theory and Behavioral Sciences

*Vicente Monteverde*

#### **Abstract**

The purpose of this document is to establish the fraud star theory and the formulation of its microeconomic model, based on the behavioral sciences. The methodology is a practical exploration, first in the convergence of the fraud economy and the behavioral sciences, and based on these tools, the new theory of the Fraud Star is formulated, formulating its microeconomic model. This chapter is a new model of the fraud star theory and its microeconomic modeling. There are no limitations on the model. The practical implications are applying the new fraud star theory and calculating your income, in different scenarios. The social implications are knowing the income for the crime of fraud, according to the level of regulations, control, and effective punishment. The present work is original; there is no new theory of the fraud star, nor its microeconomic model, in the academic field, only in this work.

**Keywords:** behavioral economics, fraud, corruption, economic analysis

#### **1. Introduction**

Fraudulent conduct is impulsive or rational?

The swindler is impulsive or rational; following a behavioral economics guide, we can make a difference, or there will be a model of fraudulent behavior.

The Behavioral Theory develops elements that will be divided into beliefs, preferences, and information processing. You'll also find terms you may be familiar with, such as loss aversion, short-termism, status quo bias, or social norms. However, you will also learn other new terms.

Richard Thaler explained that the man economic behaviour, demonstrated his reasonableness, this point is conditioned by his convictions, emotions and social environment, in addition to other facts, and is never logical reasoning.

In behavioral economics, the terms "standard" or "traditional" economic model or *"homo economicus"* are freely used when referring to views on human behavior. They do not give relevance to "behavioral" issues.

The standard economic norm assumes that people decided to improve their wellbeing more adequately, (without caring about others) using emotional intelligence and processing all available information and remembering decision processes appropriately.

Choices are continuous over time and the most appropriate rules, regardless of context, convictions, and emotions, can represent different options.

However, the development of the economy in the new years has carried out an internal investigation that claimed that behavioral economics assumptions functioned normally in a linear decision process.

Appreciation of psychological and sociological facts in the game of rules is not a new economic cliche. I suggest hint loss could be of greater value than profit, even if the two decision paths have the same path.

Nevertheless, within the 1970s and 1980s, when economic behavior began to generate significant theoretical and proven processes, consistent and behavioral economics could be accepted worldwide.

The Fraud Triangle theory developed by criminologists Donald Cressey1 and Edwin Sutherland2 [1] explains the reasons why a person may commit fraud and determines three factors that are present at the time: pressure, opportunity, and justification or rationalization, creating the fraud triangle with its three elements (**Figure 1**).

#### **Figure 1.**

*The fraud triangle theory. Source: Donald Cressey and Edwin Sutherland.*

<sup>1</sup> Donald Ray Cressey (April 27, 1919 through July 21, 1987) was an American sociologist and criminologist who made groundbreaking contributions to the study of organized crime, prisons, criminology, the sociology of criminal law, white collar crime.

<sup>2</sup> Edwin H. Sutherland (1883–1950) was an American sociologist. He is considered one of the most influential criminologists of the 20th century. He belonged to the school of symbolic interactionism and is known for the definition of differential association, a general theory of crime and delinquency that explains how the marginalized have come to learn the motivations and know-how to commit criminal activities. Sutherland received his doctorate in Sociology from the University of Chicago in 1913. He chaired the American Sociological Association in 1939.

*New Fraud Star Theory and Behavioral Sciences DOI: http://dx.doi.org/10.5772/intechopen.93455*

The Diamond Theory of Fraud later came to be considered a more comprehensive theory in relation to the theory proposed by Cressey [2]. For Wolfe and Hermanson [3],<sup>3</sup> the probability of occurrence of fraud may be due to the presence of four factors.

As everything evolves, so does fraud, and today it is a star with seven elements which is why the Star Fraud Theory is formulated, based on the theory of behavior and the formulation of the corresponding microeconomic theory of Fraud [4–12].

### **2. Definition of fraud and development of fraud theories and fraudulent conduct**

#### **2.1 Fraud**

"A false statement knowing the truth or concealment of a material fact to induce another to act to his detriment" [13]<sup>4</sup> .

#### *2.1.1 Types of fraud*

Fraud can compromise a company, either internally by company employees, managers, officers, or owners or externally by customers, suppliers, and other parties. Certainly is possible to commit fraud people and companies.

#### *2.1.1.1 Internal fraud*

Internal fraud, called labor fraud, is defined as follows: "The use of personal work for a particular enrichment through the misuse or misapplication of the company's means or assets." In summary, this form of fraud succeeds when a server, director, or manager betrays the company. Scam artists are taking technological tools and a new approach to cover fraud diagrams. The forms used in these frauds are popularly divided into classes, to test and prove over time.

#### *2.1.1.2 Outside fraud*

External fraud against a company is extensive in its forms, immodest sellers, corrupt customers and fake checks, stolen goods, and manoeuvers to extract money from the company through tricks or scams. Other examples include kidnapping, theft of confidential information, tax fraud, insurance scam, health scam, and loan scam.

<sup>3</sup> David T. Wolfe-Dana R. Hermanson-"The Fraud Diamond: Considering the Four Elements of Fraud"- CPA Journal-12-2004.

<sup>4</sup> ACFE-Association of Certified Fraud Examiners: https://www.acfe.com/who-we-are.aspx

#### *2.1.1.3 Fraud against persons*

Numerous fraudsters have also devised plans to defraud people. Identity theft,<sup>5</sup> Ponzi schemes,<sup>6</sup> phishing schemes,<sup>7</sup> and advance payment scams are just a few of the criminal forms being taken to steal money from innocent victims.

#### *2.1.1.4 Fraud triangle*

The Fraud Triangle theory developed by criminologists Donald Cressey<sup>8</sup> and Edwin Sutherland<sup>9</sup> explains the reasons why a person may commit fraud and determines three factors that are present at the time: pressure, opportunity, and justification or rationalization.

$$\text{Motivation} - \text{Opportunity} - \text{Rationalization}$$

$$\text{P (frand)} = \text{f } (\text{O, I, R}) \tag{1}$$

in which the term P (fraud) represents the probability of occurrence of fraud, being a function (f) of the terms O, which represents the opportunity, I, which refers to individual intentions, and R, which represents the rationalization or attitude personal. In this context, it is highlighted that the Association of Certified Fraud Examiners<sup>10</sup> (ACFE) defends that the Fraud Triangle Theory can be used effectively, in many cases, to understand why individuals commit fraudulent acts.
