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How can you stop employees stealing?

September 14, 2016 by David Griffiths, CEO

Profile of a Fraudster

There are reams of data and hundreds of studies investigating the type of person who would defraud an organization, most of whom are first-time offenders, but that doesn’t actually make spotting one any easier.

 In a recent KPMG study Global Profile of a Fraudster, it was found that 38% of fraudsters are perceived to be well-respected, while only 10% are of low repute. Ultimately their sense of superiority is stronger than their sense of fear or anger.

 65% of fraudsters are current employees, while a further 21% are former employees. In 62% of frauds, the perpetrator colluded with others and in 44% of cases perpetrators had unlimited control and were able to circumvent controls.

 “All fraudsters tend to have a sense of superiority, but those committing the biggest frauds tend to be even more autocratic and more frequently to have unlimited authority,” says Dean Friedman, KPMG Forensic Head of Investigations, KPMG in South Africa.

There are several behavioral red flags identified by the Association of Certified Fraud Examiners (ACFE) that are sometimes exhibited before a fraud is detected. These include people living beyond their means or in financial difficulty, displaying an unusually close relationship with a vendor or customer (indicating potential collusion), or they may have control issues and be unwilling to share duties (thereby making it more difficult for someone to uncover their deceit).  

Why do employees steal?

The fraud triangle is the most widely recognized theory of fraud reasoning and seeks to define why workers decide to commit workplace fraud.

 Developed by Donald Cressey in his 1973 work Other People's Money: A Study in the Social Psychology of Embezzlement, the theory identifies three factors that affect the decision to commit fraud namely: motivation, opportunity, and rationalization.

 Motivation is often – but not always – financial, for example mounting debts, unexpected expenses or greed. Opportunity arises when a company has lax controls in place that allows an employee to exploit or manipulate corporate processes like invoice approval or expense claims. And rationalization is the process by which a person will convince themselves that the act of fraud is justified.

Controlling opportunity

Organizations invariably, and justifiably, tend to focus on the part of the triangle that they have the most control over - opportunity.

KPMG’s study found that weak internal controls are a significant issue for companies victimized by fraud and the problem is growing. Compared with 2013, there was a big jump, from 18 percent to 27 percent, in the number of fraudsters who committed (or who appeared to commit) their acts because an opportunity presented itself due to weak controls or a lack thereof.

Companies can remove as many of the opportunities as possible for a person to commit fraud by implementing strong internal controls. These include separation of duties so that one person doesn’t have the ability to both request and approve invoices, 3-way matching (of purchase orders, to invoices, to delivery receipts), monitoring of the supplier file, setting up an internal advisory committee, regular compliance risk analysis, establishing an anonymous reporting hotline and making sure all fraud controls are clearly visible.

Detecting fraud

In some cases, even relatively robust internal controls can be circumvented by a determined fraudster. This is where technology can significantly enhance the detection of fraud where it already exists. Data analytics allows organizations to sift through millions of transactions and thousands of suppliers looking for anomalies that require further investigation. These could include unusual transaction dates, anomalies in high and low transaction values and the detection of outliers within defined parameters. Powerful analytics software can also compare employee transaction history with peers, or spot anomalies in approval patterns.

Fraudsters are increasingly using technology to enable their own ill-gotten gains, and companies need to fight back with technology of their own.

Influencing motivation and rationalization

There are also ways an organization can influence the other sides of the fraud triangle. A company that promotes high ethical values and standards, especially from the very top of the executive hierarchy, can help reduce the ability of a potential fraudster to rationalize their actions.

Perceptions of fairness within an organization, whether they relate to rewards and punishments or compensation and promotion, can also be used as ways to rationalize fraud. Companies should set clear policies and guidelines that are transparent and implemented at all levels, to maximize perceptions of fairness and minimize rationalization of fraud. Educating and informing employees of fraud policies and procedures can also make it more difficult for them to rationalize their behavior if there are clear guidelines in place.

The KPMG study found that financial gain or greed was the overriding motivation for 66% fraudster, but 13% were driven by the organizational culture, and around 12% by the desire to meet targets or to hide losses in order to receive bonuses, hold onto their job or protect the company.

Organizations need to ensure that the pressure to perform is not lighting the touchpaper that could motivate employees to commit fraud.

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