Sign of a pathological liar
'All pathological liars have a purpose, i.e., to decorate their own person, to tell something interesting, and an ego motive is always present. They all lie about something they wish to possess or be.'

- Healy, W., & Healy, M. T. (1915). Pathological lying, accusation, and swindling: A study in forensic psychology
Pathological lying has been defined as a chronic, uncontrollable, compulsive need to lie, regardless of the fact that the lie is evident, that it serves no purpose, or the obvious consequences of speaking the lie. It is a lie that has internal motives rather than external ones. Also, if there are external motives, they are secondary to the internal motives. For instance, one may lie for personal gain, for power, for money, or simply to shirk blame. One may lie for the benefit of others too. But pathological lying has nothing to do with these motives. It is triggered by psychological motives such as to enhance one's self-esteem, to overcome the guilt of being a certain way, or to fulfill a particular fantasy.
Many possible internal motives for PF (pseudologia fantastica) include autonomy, the need for regulation of self-esteem, repression or denial of reality, power or aggression (at being able to dupe another), and wish fulfillment.

- Ford, C. V., King, B. H., & Hollender, M. H. (1988). Lies and liars: Psychiatric aspects of prevarication. American Journal of Psychiatry
Studies have revealed that pathological liars have more white matter than gray matter in their prefrontal cortex, the area of the brain that enables people to remain moral and feel remorse for their actions. Excessive white matter is what may be causing these people to lie, manipulate, and deceive individuals compulsively. Gray matter is what enables people to keep the need to deceive and lie under control. This is probably the reason people may turn into pathological liars.
Identifying a Pathological Liar
Statements made by pathological liars have an unreal quality about them. They seem rooted in fantasy and this is very obvious to the listener. Some of their lies are easily discernible. For instance, they may say that they own a huge estate that has ranches that breed a unique hybrid variety of horses and that these are the fastest horses in the world.
A pathological liar may concoct lies in public to gain attention. They like to portray themselves as either heroes in or victims of a particular situation, which they believe will make life more interesting.
They begin to believe their own stories. A pathological liar may not be lying deliberately. He/she believes in the lies completely. This may stem from his/her need to have the last word or to one-up others in every instance. In this case, the person may seem rather self-centered with very little respect for other people's feelings.
One of the simplest ways to identify pathological liars is to catch their lies. It is comparatively easy to do this because such individuals tend to change their stories frequently. One day they may say something and the next they may change the facts of the same. They may not be able to keep a record of the stories that they have fabricated, which then becomes easy to catch.
Pathological liars are likely to get defensive even if an innocent question is asked in relation to the given situation. They tend to feel threatened when questioned. This could explain their reaction to any questions asked. Another reaction to being confronted is that they may just lie more to get out of the situation at hand.
These liars have no remorse when lying. They do not think that it is bad to lie. They do not worry about the consequences either. They simply lie and go on with life as if it were the most normal thing to do.

These people do not value honesty and are known to relate events and incidents that have been told in confidence to others. While doing so they may also exaggerate the facts as well. As such, they can't really be trusted with secrets.
To summarize it all, the lies spoken by pathological liars are a means of gratification for themselves. The pleasure gained by lying (for whatever reason) is the reward for the behavior. These individuals do hold the capacity to recognize that they have been lying, though they may be deeply rooted in the fantasy world they have created for themselves.

The first step toward treating a pathological liar is to teach the people surrounding him how to identify one. This includes clinicians, therapists, lawmakers, and law enforcers. Psychotherapy has been found useful in treating pathological liars to a certain extent. However, treating them is extremely challenging because firstly, they should be willing to own up to the fact that they have been lying, and secondly, it is likely that they may manipulate the therapist into believing their lies. There may also be the likelihood that their habit of lying is a symptom of a larger problem like a personality disorder. In such cases, treatment must go beyond psychotherapy and involve the prescription of drugs. Experts suggest that treatment will never be successful until the liar himself is not willing to accept that he has a problem.