Fifty Shades of Fraud, Part III By Ben P. Lee, CPA, CFE, CFF, CGMA, CGFM, CGFO Managing Member, Coastal CPAs, LLC
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n Parts I and II, I discussed cases that I had investigated and served as an expert witness. In this article I will discuss how to deter fraud in your organization, regardless of its size or number of employees. The best deterrent is a fraud prevention program.
Is someone eating your cheese? It is highly likely! Every year the Association of Certified Fraud Examiners issues its worldwide “Report to the Nations.” It is the most comprehensive and widely quoted source of occupational fraud data in the world. Here are some interesting facts from the “2018 Global Study of Occupational Fraud and Abuse” (an analysis of 2,690 cases of fraud investigated between January, 2016 and October, 2017). There were 2,690 real cases resulting in $7 billion + in total losses. The median loss per case was $130,000. In 22% of cases there were losses of $1 million or more. The median duration of a fraud scheme was 16 months. Tips from employees was the common initial detection method. Organizations with Fraud Prevention Programs had lower fraud losses and quicker detection. The ACFE has found that organizations typically lose 5% of revenues each year to fraud. That is cheese you could have been eating. A Fraud Prevention Program is the best investment that an organization can make. Don’t let yourself get caught thinking “this would never happen to me or my organization” or “my organization is too small to need fraud prevention.” You should be diligent even when you 64
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believe that your organization has good controls in place. You don’t want to be complacent and shrug off a prevention program simply because you trust your employees and believe that they’re all good people. Unfortunately, that trust may be misplaced. Prevention activities are intended to secure the organization and its processes against fraud. It is management’s responsibility to design and implement controls to prevent and detect fraud. They should also set the proper tone and establish controls to prevent, deter and detect fraud. The internal and external auditors are NOT responsible for fraud prevention. Every organization has internal controls but they don’t all have fraud prevention! There are several components involved in creating a fraud prevention program. Implement background checks on all employees. Maintain a fraud risk assessment process and regular fraud awareness training. Have an accountability matrix and reporting mechanisms in place. Implement continuous controls monitoring (CCM). Ensure that your “tone at the top” is one of honesty and that you have a code of ethics and proactive anti-fraud policies in place. Let’s get back to the important word: trust. Yes, we all trust our employees, but we must verify that trust. This second step of verification of trust is commonly the window that is left open. I have worked on hundreds of fraud cases where the fraud has already been detected by accident or a tip. My first question to management is “How did this happen?” Their
response is often “We trusted them.” However, there was no verification of that trust. In the broadest terms, fraud means obtaining something of value or avoiding an obligation by means of deception. “The intensity of desire and the perception of opportunity are personality variables. The balance between desire and opportunity moves. Temptation to steal fluctuates with individual temperament and situation.” (Nettler 1974) Motivation is therefore a combination of an individual’s personality and the situation in which they find themselves. Conversely, psychological factors will influence the way a person interprets the situation they are in and this, in turn, will influence the actions they choose to take. At first glance, a psychological explanation for fraud would appear simple: greed and dishonesty. Such an explanation is, however, overly simplistic. There are many in society who are aggressively acquisitive, but generally law abiding. Moreover, not all dishonest people commit fraud. To date, behavioral scientists have been unable to identify a psychological characteristic that serves as a valid and reliable marker of the propensity of an individual to commit fraud. American Criminologist Donald Cassey developed a theory known as the Fraud Triangle that explains the factors that lead to fraud and other unethical behavior. When businesses and organizations understand the Fraud Triangle, they can more effectively combat criminal behavior that negatively impacts their operations.
