Fraud & Corruption – The Nice Guy Crime: The theft of assets through fraud in corporations has been acknowledged as a serious problem. But too often loss prevention and compliance practitioners focus on the actions of outsiders. The ignored reality is that a great deal of fraud is done by employees and sub-contractors who had legitimate access to company assets. In order to prevent internal theft compliance professions must develop measures that both prevent theft and in the worst case makes detecting of losses readily apparent. However, placing all employees in general under suspicion is not acceptable.
Understanding Insider Fraud
The core problem in stopping insider fraud is the resistance to accepting that employees, often those who were trusted, commit fraud against the company. It is natural to want to trust co-workers as it helps to have a cooperative atmosphere in the company. However, the cliché “In God we trust, all others we check”, is not without a basis in fact. Employees/insiders commit fraud for many reasons. They are all common reasons that employees commit fraud against their company. For example:
- Personal debt
- Greed
- Personal problems
- The feeling that the organization discriminates against them or that they are not appreciated
This is not an exhausted list, but it can be used as a starting base in preventing fraud.
Fraud Triangle Theory
Understanding and implementing Dr. Donald R. Cressey’s Fraud Triangle Theory that attempts to explain insider fraud could help in initiating an effective strategy in deterring insider fraud.
The components of the Fraud Triangle Theory:
- Motive: Inability of the employee to pay off debts, poor relationship with supervisors, feels unappreciated.
- Opportunity: Conditions in the company that make it easy for employees to commit fraud. Lack of physical security, checks and balances, poor or ignored accounting procedures.
- Rationalization: Employees convince themselves that they are not doing anything wrong, that stealing is justified and or socially acceptable
Control the opportunity
Whenever all three components of the Fraud Triangle Theory are present at the same time, it is not just probable; it is inevitable that some employee will commit fraud sooner or later. Therefore, any loss prevention and compliance protocols established to protect company assets should incorporate the Fraud Triangle Theory to prevent the three components from co-existing. Common sense dictates that one will not have direct control of all of the three components of the theory, but one component is controllable – Opportunity. It would be difficult for compliance and loss prevention professionals to monitor motive and rationalization factors in employees even in small companies, and nearly impossible in large companies. On the other hand, opportunity to commit fraud can be greatly controlled and monitored.
Measures against “Opportunity”
As opportunity is the one portion of the Fraud Triangle Theory that can be directly controlled, it should be the center of corporate security/compliance strategies. This requires that the corporate security, compliance, loss prevention, IT security managers and top management work close together and coordinate their efforts. Physical security in concert compliance and IT must ensure that access to the corporate assets is controlled in a manner that discourages theft, sabotage and embezzlement.
Similarly compliance must design internal procedures (Checks and balances) that prevent the creation of opportunity for employees to commit crime, and IT ensures that computer systems cannot be manipulated. However, without strong support from top management, opportunity for employees to commit crime will not be reduced. The attitude of top management is critical for removing the opportunity of crime in the company.
Measures against “Motive” and “Rationalization”
The best method to stop the remaining two corners of the Fraud Triangle Theory, motive and rationalization is through good leadership and inter-personal skills. An ignored reality is that content and well lead employees develop a sense of loyalty to the company: Loyal employees do not commit crimes against their company. Engaged leaders at all levels of management that become attuned to the needs of their subordinates and their personalities, put themselves in a position to ensure that their employees feel appreciated, and that rationalizations for harming the company are minimized.
Additionally, compliance should not be viewed by management as a bother. Nor should compliance be used in deciding how much non-compliance will cost as opposed to the profit made before the company is caught not complying. This form of leadership is the breeding ground for insider fraud as it enables employees to rationalize stealing from the company because the management/leadership cheats: Ergo cheating is socially acceptable.
Cases in Point
- Recently four top managers from Barclays Bank in England were charged with conspiracy to commit fraud. The charges stem from questionable fund raising with Qatar during the financial crisis.
- Airbus is being investigated for suspected multi-million dollar bribery and fraud offenses in several countries.
- A former bookkeeper of J&B Pipe Supply Co. in Oklahoma City, Oklahoma embezzled 7 million dollars which the employee diverted to bank accounts that he had control over.
The commonalities in all of these cases are:
- Senior Management Involvement
- Inadequate or Ignored Apparent Checks and Balances
- Opportunity
The Bottom Line
The motives and rationalization of the persons involved in the referenced cases were probably not easy to recognize by co-workers, supervisors, or by compliance. However, the opportunity to commit fraud should have been noticed. Furthermore, these cases are good examples of senior managers, with or without consulting compliance, putting profit and greed over the cost of non-compliance.
German Summary
Immer wieder geraten Unternehmen, Verbände oder Organisationen auf Grund von Betrug in die Schlagzeilen. Die Frage ist nun, wie solche Handlungen entstehen, was sind die Gründe dafür? Ansätze dafür bietet die “Betrugs-Dreieck Theorie” (Fraud Triangle Theory). Danach können schädliche Handlungen für das Unternehmen entstehen, wenn einer der folgenden Komponenten zu trifft:
- Gelgenheit (Opportunity) – Nutzung möglicher Gelegenheiten auf die Vermögenswerte des Unternehmens zuzugreifen
- Motiv – z.B. die persönliche Motivation des Täters auf Grund finanzieller Nöte
- Rechtfertigung (Rationalization) – “Ich bin derjenige mit dem höchsten Deckungsbeitrag und habe demzufolge Anrecht auf diese Gelder."
Es ist nicht einfach die Kontrolle über alle drei Komponenten zu erhalten, insbesondere Motiv und Rechtfertigung. Allerdings kann die “Gelegenheit” kontrolliert und durch entsprechende Maßnahmen eingegrenzt werden.