Tackling Internal Fraud
Just what makes trusted employees commit internal 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.
But detecting and preventing fraud won’t come easy unless you know what you’re looking for, who you’re looking for, and why they’re stealing in the first place.
Don’t wait until it’s too late to protect your company from fraud. Learn more about the 41 Types of Fraud and How to Detect and Prevent Them.
The average internal fraud scheme costs a company $150,000 and a typical company loses five per cent of its annual revenue to fraud, according to the ACFE’s Global Fraud Study 2016.
The same study reported that nearly a quarter of the fraud cases studied caused at least $1 million in losses.
But, fraud does more than just damage the business financially.
Internally, fraud negatively impacts the environment of the company, ruining trust and raising suspicions betweens management and employees.
Externally, fraud may ruin the company’s reputation. As unfair as it may seem, since the company, too, is a victim during internal fraud, prospective clients tend to avoid wavering businesses.
Confronting a Fraudster
If you’re not careful while confronting a fraudster you can cause even more damage.
Learn how best to confront an employee who has been stealing with our cheat sheet below.
One of the oldest and more basic theories in fraud deterrence and detection is the Fraud Triangle Theory, developed in the 1950s by famed criminologist Donald R. Cressey. His simple framework incorporates three key elements: opportunity, motivation and rationalization.
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.
These employees typically have senior positions. Their powerful role makes it easier for them to influence others to look the other way.
It won’t seem suspicious when they say things like: “You can trust me with this!” or “I’ll handle it, you go enjoy your weekend!”.
The fact that these are your most trusted employees gives them even more opportunity to fool you.
The motivation to commit internal fraud can stem from a number of situations, according to 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. Addictions, such as drugs, alcohol or gambling, can create a financial need for someone to commit fraud.
Non-financial motivators could be professional advantage. An employee might be experiencing pressure at work to hit unrealistic targets or be trying to hide recent bad performances.
This motivation can sometimes come from a third-party. A relative, spouse or close friend might encourage the fraudster to abuse vacation days or claim benefits they’re not entitled to.
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 behavior to the feeling that they are underpaid, under-appreciated or constantly overlooked for a promotion or a bonus.
Other times 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 won’t even notice it’s gone.
Of the three elements in the fraud triangle, opportunity is the one area where employers have the most control, so it makes sense to pay particular attention to that part.
Eliminate 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 defense. 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.