Just what makes trusted employees commit fraud? Are they greedy, evil, desperate, resentful? Are they just bored, looking to see what they can get away with? Employers are often left scratching their heads when they discover internal fraud, wondering how they missed it, why their trusted employees are engaging in it and how they could have prevented the associated losses.
The average internal fraud scheme costs a company $160,000 and a typical company loses five per cent of its annual revenue to fraud, according to the ACFE’s Global Fraud Study 2010. Nearly a quarter of the fraud cases studied caused at least $1 million in losses.
The Fraud Triangle
One of the oldest and more basic theories in fraud deterrence and detection is the “fraud triangle”, developed in the 1950s by famed criminologist Donald R. Cressey. His simple framework incorporates three key elements: opportunity, motivation, and rationalization.
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In his 1953 work, “Other People’s Money: A Study in the Social Psychology of Embezzlement,” Cressey wrote:
“Trusted persons become trust violators when they conceive of themselves as having a financial problem that is non-shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions on themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.”
Employees have the opportunity to commit and conceal fraud when they have access to assets and privileged information as part of their jobs. The more responsibility a manager has, the more opportunity he or she will have to access sensitive areas of the company and the greater capacity he or she will have to conceal any wrongdoing. The fact that these are your most trusted employees gives them even more opportunity to fool you.
The motivation to commit fraud can stem from a number of situations, according to “Essentials of Corporate Fraud“, by Tracy L. Coenen. She describes motivation as a pressure or a need felt by the person who commits fraud. The need could be financial, such as debt, or even “perceived” financial need, wherein a person desires material things that he or she does not have the money to buy.
Non-financial motivators could be work pressure for delivering results or the need to cover bad performance. Addictions, such as drugs, alcohol or gambling, can create a financial need that someone to commit fraud.
In order to rationalize their actions, employees who commit fraud convince themselves that what they are doing is justified in some way. Sometimes they attribute their behaviour to the feeling that they are underpaid, underappreciated or missed over for a bonus or raise. Sometime they convince themselves that they are just borrowing the money and will return it, or that it’s such a small amount that the company doesn’t need it.
Tackling the Opportunities
Of the three elements in the fraud triangle, opportunity is the one area in which employers have the most control, so it makes sense to pay particular attention to eliminating opportunities for your employees to engage in fraud in your organization. A secure workspace with controls over data, assets and procedures is your first line of defence. Employers must allow employees access to only the systems, information, and assets that are truly necessary for them to do their jobs. Other methods for limiting opportunities for fraud include segregating duties, ensuring proper authorization for transactions, providing independent checks on performance, using an anonymous reporting system and monitoring access to data, assets and systems.
By tackling the opportunities for fraud in your organization even the most motivated criminal will have to look elsewhere for a victim.