Occupational Fraud Flashcards
Survey participants estimated that the typical organization loses ___ of its revenues to fraud each year.
5%
The frauds reported to us lasted a median of ___ months before being detected.
18
Asset misappropriation schemes were by far the most common type of occupational fraud, comprising ___ of the cases reported to us, they were also the least costly form of fraud, with a median loss of ___
87% - $120,000.
Financial statement fraud schemes made up just ___ of the cases in our study, but caused the greatest median loss at ___
8% - $1 million
Corruption schemes fell in the middle, occurring in just __ of reported cases and causing a median loss of __
over one-third - $250,000.
Occupational fraud is more likely to be detected by ___ than by any other method.
a tip
The majority of tips reporting fraud come from ___.
employees of the victim organization
____ and ___ schemes pose the greatest risks to organizations throughout the world.
Corruption and billing, more than 50% of the frauds reported to us.
________is a signifcant threat to small businesses.
Occupational fraud
the industries most commonly victimized in our current study were
the banking and fnancial services, government and public administration, and manufacturing sectors.
The presence of anti-fraud controls is notably correlated with ___
signifcant decreases in the cost and duration of occupational fraud schemes.
Perpetrators with ___ tend to cause much larger losses.
higher levels of authority The median loss among frauds committed by owner/ executives was $573,000, the median loss caused by managers was $180,000 and the median loss caused by employees was $60,000
The longer a perpetrator has worked for an organization, the ___
higher fraud losses tend to be. Perpetrators with more than ten years of experience at the victim organization caused a median loss of $229,000. By comparison, the median loss caused by perpetrators who committed fraud in their frst year on the job was only $25,000.
The vast majority (77%) of all frauds in our study were committed by individuals working in one of six departments:
accounting, operations, sales, executive/upper management, customer service and purchasing.
Most occupational fraudsters are
frst-time offenders with clean employment histories. Approximately 87% of occupational fraudsters had never been charged or convicted of a fraud-related offense, and 84% had never been punished or terminated by an employer for fraud-related conduct.
In 81% of cases, the fraudster displayed one or more behavioral red fags that are often associated with fraudulent conduct.
Living beyond means (36% of cases), fnancial diffculties (27%), unusually close association with vendors or customers (19%) and excessive control issues (18%)
Nearly ___ of victim organizations do not recover any losses that they suffer due to fraud.
half
External audits detected only
3%
Gary Green uses the term “occupational crime,” which he defines as
any act punishable by law which is committed through opportunity created in the course of an occupation which is legal
Green further delineates occupational crime into four categories:
• Crimes for the benefit of an employing organisation (organisational occupational crime)• Crimes by officials through exercise of their government-based authority (state authority occupational crime) • Crimes by professionals in their capacity as professionals (professional occupational crime) • Crimes by individuals as individuals
Edwin H. Sutherland
believed that the learning of criminal behaviour occurs with other persons in a process of communication. Therefore, he reasoned, criminality cannot occur without the assistance of other people. Sutherland believed that the learning process involved two specific areas: the techniques to commit the crime, and the attitudes, drives, rationalisations, and motives of the criminal mind.
Cressey’s Hypothesis
Trusted persons become trust violators when they conceive of themselves as having a financial problem which 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 of themselves astrusted persons with their conceptions of themselves as users of the entrusted funds or property.
fraud triangle
One leg of the triangle represents a perceived non-shareable financial need. The second leg represents perceived opportunity, and the final stands for rationalisation.
Cressey found that the embezzlers he studied generally rationalised their crimes by viewing them as:
(1) essentially non-criminal, (2) justified, or (3) part of a general irresponsibility for which they were not completely accountable
The independent businessmen in Cressey’s study were persons who were in business for themselves and who converted “deposits” that had been entrusted to them. excuses:
(1) they were “borrowing” the money they converted, or (2) the funds entrusted to them were really theirs—you can’t steal from yourself.
Cressey defined long-term violators as individuals who converted their employer’s funds, or funds belonging to their employer’s clients, by taking relatively small amounts over a period of time.
(1) they were embezzling to keep their families from shame, disgrace, or poverty; (2) theirs was a case of “necessity”; their employers were cheating them financially; and (3) their employers were dishonest towards others and deserved to be fleeced
ABSCONDERS
people who take the money and run The absconders rationalised their conduct by noting that their attempts to live honest lives had been futile (hence their low status). They also adopted an attitude of not caring what happened to them, and a belief that they could not help themselves because they were predisposed to criminal behaviour.
most important conclusion to be drawn from the Cressey study was
The three events make up the conditions under which trust violation occurs and the term ‘cause’ may be applied to their conjuncture since trust violation is dependent on that conjuncture. Whenever the conjuncture of events occurs, trust violation results, and if the conjuncture does not take place there is no trust violation.
Dr. Steve Albrecht of Brigham Young University. Albrecht and two of his colleagues, Keith R. Howe and Marshall B. Romney
conducted an analysis of 212 frauds in the early 1980s
The ten most highly ranked factors from the list of personal characteristics (Albrecht’s research)
Living beyond their means An overwhelming desire for personal gain High personal debt A close association with customers Feeling pay was not commensurate with responsibility A wheeler-dealer attitude Strong challenge to beat the system Excessive gambling habits Undue family or peer pressure No recognition for job performance
The ten most highly ranked factors from the list dealing with organisational environment (Albrecht’s research)
- Placing too much trust in key employees 2. Lack of proper procedures for authorisation of transactions 3. Inadequate disclosures of personal investments and incomes 4. No separation of authorisation of transactions from the custody of related assets 5. Lack of independent checks on performance 6. Inadequate attention to details 7. No separation of custody of assets from the accounting for those assets 8. No separation of duties between accounting functions 9. Lack of clear lines of authority and responsibility 10. Department that is not frequently reviewed by internal auditors
Fraud Scale (Albrecht’s research)
included the components of situational pressures, perceived opportunities, and personal integrity
Albrecht describes situational pressures as
the immediate problems individuals experience within their environments, the most overwhelming of which are probably high personal debts or financial losses
Personal integrity (Albrecht’s research)
refers to the personal code of ethical behaviour each person adopts. While this factor appears to be a straightforward determination of whether the person is honest or dishonest, moral development research indicates that the issue is more complex
perpetrators of large frauds used the proceeds to (Albrecht’s research)
purchase new homes and expensive automobiles, recreation property, expensive vacations, support extramarital relationships, and make speculative investments
Perpetrators who were interested primarily in “beating the system” (Albrecht’s research)
committed larger frauds
perpetrators who believed their pay was not adequate (Albrecht’s research)
committed primarily small frauds
Lack of segregation of responsibilities, placing undeserved trust in key employees, imposing unrealistic goals, and operating on a crisis (Albrecht’s research)basis were
all pressures or weaknesses associated with large frauds
College graduates were less likely to spend the proceeds of their loot (Albrecht’s research)
to take extravagant vacations, purchase recreational property, support extramarital relationships, and buy expensive automobiles
those with lower salaries were (Albrecht’s research)
more likely to have a prior criminal record
Richard C. Hollinger and John P. Clark
The Hollinger-Clark Study
They concluded that employees steal primarily as a result of workplace conditions, and that the true costs of the problem are vastly understated: “In sum, when we take into consideration the incalculable social costs … the grand total paid for theft in the workplace is no doubt grossly underestimated by the available financial estimates
Hollinger and Clark defined two basic categories of employee deviant behaviour:
(1) acts by employees against property, and (2) violations of the norms regulating cceptable levels of production
production deviance
was two to three times more common than property violations
The research of Hollinger and Clark strongly suggests that employees who are dissatisfied with their jobs
are the most likely to seek redress through counterproductive or illegal behaviour in order to right the perceived “inequity.
EMPLOYEE PERCEPTION OF CONTROL
We find that perceived certainty of
detection is inversely related to employee theft for respondents in all three industry sectors— that is, the stronger the perception that theft would be detected, the less the likelihood that the employee would engage in deviant behaviour
Formal controls
can be described as external pressures that are applied through both positive and negative sanctions
informal controls
consist of the internalization by the employee of the group norms of the organisation
same kinds of employees who engage in other workplace deviance are
also principally the ones who engage in employee theft
substantially increasing the internal security presence
does not seem to be appropriate,
given the prevalence of the problem. In fact, doing so may make things worse
Hollinger and Clark asserted that management must pay attention to four aspects of policy
development:
(1) a clear understanding regarding theft behaviour, (2) continuous dissemination of positive information reflective of the company’s policies, (3) enforcement
of sanctions, and (4) publicising the sanctions.
perhaps the most important overall policy implication that can be drawn .
is that theft and workplace deviance are in
large part a reflection of how management at all levels of the organisation is perceived by the employee.
if efforts are made to reduce employee theft without reducing its underlying causes (e.g., employee dissatisfaction, lack of ethics)
the result could create a “hydraulic effect.” That is, tightening controls over property deviance may create more detrimental acts affecting the productivity of the organisation—if we push down employee theft, that action may push up goldbricking.
increased management sensitivity to its employees
would reduce all forms of workplace deviance
special attention should be afforded young employees
as these are the ones statistically the most likely to steal
