As many continue to deal with the impact of the economic downturn, individuals, families and companies are facing mounting financial pressures and are having to make some very serious decisions that are unprecedented in recent times. Whether they are dealing with unemployment, foreclosure, mounting debt or lagging income, life-impacting decisions are being forced on everyday people like you and me.
In the study of fraud, there is an 80/10/10 adage that states 10% of the population is honest and would never steal, lie or commit a crime regardless of circumstance; 10% of the population is inherently dishonest and would commit a crime at will; and the other 80% of the population, given the right environment, circumstance and opportunity would behave unethically. Take a look at the statistics below:
As you can see, a majority of fraud cases are committed by individuals with no prior criminal history or employment issues. These cases resulted in a median loss of $175,000 and were committed by "normal" people that could include your co-workers, your neighbors, and even the people you most trust and admire.
The elements required to create the "perfect storm of fraud" were originally defined by famed criminologist Donald Cressey and help to explain why everyday people commit fraud. He created the Fraud Triangle, which outlines the 3 components that are required for an ordinary individual to make unethical decisions: rationalization, unshareable need, and opportunity.
Rationalization is the attempt by an individual to justify his or her actions. Common thought processes include entitlement for extra hours worked, feeling underpaid or undervalued, borrowing the money with the intent to pay it back, or believing that the company doesn't need the money as much as they do.
An unshareable need is something that drives an individual to commit fraud, but is not talked about socially. Examples include a gambling or drug addiction, mounting credit card debt, medical bills, a spouse's job loss, the perceived need for an affluent lifestyle, or even a need to have higher than expected results at work.
Opportunity is the ability to commit and conceal a fraud through the normal course of one's job responsibilities. As companies continue to streamline operations, employees are being asked to take on additional responsibilities and assist in areas outside of their normal roles. These additional responsibilities are allowing employees to conceal their activities with relative ease because of the lack of segregation of duties and monitoring.
The current economy is putting pressure on everyone, and with no immediate reprieve in sight, individuals in the 80% category are facing some difficult circumstances. When facing questions like How do we pay for groceries this month? How are we going to keep making our mortgage payments that are suddenly increasing? or How are we going to make our numbers this quarter? the three attributes of the fraud triangle suddenly start to become more evident, and may tempt individuals to look for alternative sources to answer those questions.
Below are a few of the most common behavioral red flags present during a fraud scheme. As you can see, unshareable needs are embedded within many of these categories:
Remember that the presence of red flags does not automatically mean fraud is occurring, it just means there is a heightened risk for fraud to occur.
You can reduce the risk of fraud in your business in two key ways:
- Communication/Awareness
- Controlling the opportunity
Communication/Awareness. Your biggest partners in preventing and detecting fraud are your employees. Research has shown that the largest generator of fraud detection is through "tips," and that close to 60% of these tips came from employees. Employees should be trained on what fraud is, how it occurs and how it harms the organization. They should also have a level of confidence that tips can be made confidentially with no fear of retaliation for whistle-blowing activities. Creating a culture of awareness and open communication will assist in your efforts to reduce the risk of fraud in your environment.
Controlling the opportunity. Establishing controls throughout your organization makes it more difficult for fraud to occur by removing many of the opportunities to commit fraud. There are two sets of controls that companies can implement depending on their environment. Preventative controls such as segregation of duties and access controls can be implemented in the beginning of a process to not allow fraud to happen. Detective controls such as monitoring or reconciliations can be implemented on the back-end to help to identify the occurrence of fraud after the fact. Although preventative controls are preferred, at a minimum, proper detective controls should be established within all organizations.
It's difficult to do anything about an employee's unshareable need or the rationalizations going through their mind; however, you can communicate the repercussions of fraud to your team, and reduce the opportunities to commit it. A fraud risk assessment will help you identify where you have potential control lapses such as segregation of duties risks or a lack of monitoring/override controls. The assessment will rank those risks based upon impact and likelihood. At that point, you can implement controls that will assist in preventing the fraud from occurring and detecting the fraud if it does occur.
References: Association of Certified Fraud Examiners, 2010 Report to the Nations on Occupational Fraud and Abuse
Brian Benes, CISA, CFE, is a Risk Services Manager with Schenck. Brian's experience includes managing the internal audit functions of two large Wisconsin companies, where he performed IT compliance, financial, and operational audits. In addition to his IT data security expertise, he also assists clients with risk assessments, fraud prevention and investigation, Sarbanes-Oxley Section 404 compliance, and internal audit services.