Jane was a trusted accountant for a large regional school district in central New York. She was so well-liked and trusted that she was given numerous responsibilities within the district's special education department.
Among these responsibilities were all accounting, billing, check-writing, authorization and check-signing functions. When she left her position after 15 years and moved to Las Vegas, no one could believe the fraud uncovered by her successor. How could such a nice person steal nearly $100,000 from special education kids?
This is a true story, although the names and places have been changed. According to the Association of Certified Fraud Examiner's 2006 Report to the Nation on Occupational Fraud and Abuse, an estimated 5 percent of revenues were lost during 2006 as a result of occupational fraud and abuse. This translates to $652 billion in fraud losses when applied to the U.S. gross domestic product.
An ACFE study of more than 1,100 cases of occupational fraud during 2004 and 2005 found the median loss from these frauds was $159,000, with nearly 25 percent of the losses exceeding $1 million each.
Of all frauds in this study, a little more than 30 percent were committed by employees within the accounting department, 20 percent were committed by upper management or executive-level employees, and more than 14 percent were committed by sales personnel.
So why do employees commit fraud? Many of us would begin to guess by accusing the perpetrators of being "con artists" with few, if any, morals. Perhaps they were just born with a "few defects," or they "weren't raised the right way" or some other excuse.
The painful truth is that good people can and do commit fraud. The study found that less than 8 percent of perpetrators had convictions prior to committing their frauds. So, while background checks can be a valuable anti-fraud tool, most employees do not begin a new position with the goal of becoming a criminal.
Three factors must generally be present for employees to commit fraud: pressure, opportunity and rationalization. These three factors represent "The Fraud Triangle," a theory founded by criminologist Donald Cressey.
Cressey interviewed nearly 200 incarcerated embezzlers, including top executives, and found that the majority committed fraud to meet their financial obligations. Of course, financial obligations produce obvious pressures. But a dissatisfied employee can be consumed by a similar pressure to steal. If employees feel underpaid or unappreciated, they might believe they are only stealing what is rightfully theirs.
Whatever the pressure to steal, opportunity must exist. Poor internal controls give birth to such an opportunity. If a single employee is responsible for printing checks, signing checks, handling all accounting functions, making deposits, etc., and they are under significant financial duress, he or she has both pressure and opportunity. To effectively deter fraud, it is vitally important that an organization begin by implementing strong internal controls to mitigate the element of opportunity.
Lastly, the culpable person must be able to rationalize that their activity is something other than of a criminal nature. They might say: "Criminals steal what doesn't belong to them. I am no criminal. I've earned this." They could also rationalize a theft as "borrowing" the money with the good intention of paying it back. When someone on a fixed income is going through a financial crisis, it might be easier for them to "borrow" from their employer instead of getting a loan from the bank.
Do you have employees that have some type of pressure or motivation, see an opportunity and can rationalize an act of fraud? Maybe you do, but just don't know it, yet. If so, your organization may already be a victim of occupational fraud.
This article was originally published in the Boulder County Business Report in July of 2008.