The anatomy of a fraudster
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Fraud is a very broad-based term. There’s fraud between individuals, internet scams and phishing schemes. Occupational fraud is one of the biggest areas of fraud and represents employee or contractor fraud against an employer. As such, the perpetrators of occupational fraud usually have a relationship with their victim.
These frauds can take the form of asset misappropriation, a fancy word for theft, or it can take the form of corruption, generally involving an insider and an outsider to the victim organization. It can also take the form of financial statement fraud (an example would be falsified financial statements). While this third form of fraud is statistically the least likely to occur, it leads to the largest damages per instance of the three forms of fraud discussed.
In a recent survey by the Association of Certified Fraud Examiners, it was estimated that companies lose about five percent of their revenues to fraud. When you apply that to the U.S. gross domestic product (GDP), you’re talking approximately $900 billion annually. This can be as small as employees taking pens, pencils, and paper home, but could also result from multi-billion dollar irregularities on financial statements.
The most commonly hit firms are small firms because they generally don’t have the wherewithal to be on guard against it. So keep your eyes and ears open and be on the lookout for situations that just don’t seem right, and which don’t serve your bottom line.
That brings us to the anatomy of a fraudster. Stated another way, what motivates individuals to commit fraud and what does a person that commits occupational fraud “look like”?
First, there are red flags for fraud that present themselves in personality traits and behaviorisms. Individuals enduring addictions or severe pressures in their work or home life may succumb to the perceived benefits from defrauding their employer. In economic downturns, when people lose jobs and gain pressure for unpaid bills, they can turn to desperate measures to afford their lifestyle.
Look for the person living a proverbial champagne lifestyle on a beer income. People who have expensive tastes but don’t have the ability to fund those tastes could fall prey to the temptation to take what is not rightfully theirs.
Then there is the wheeler-dealer. Everybody knows someone like this: always “knows a guy who knows a guy,” has a “can’t lose” scam brewing, leading to pressure to fulfill, which in turn leads to the propensity to commit fraud.
And then there is what’s known as the fraud triangle. The first side of the triangle represents the pressures or motives that lead people to steal. These motivations are unique to the individual. The second side of the triangle represents the opportunity to commit fraud. This element can be controlled by companies by instituting internal controls and audits, in addition to other checks and balances.
Finally, the triangle’s third side represents rationalization. This is how people tend to justify their behavior: things like “it’s owed to me,” “it’s only a loan,” “I’ll repay it later,” or “I didn’t get a big bonus this year, it’s due to me anyway.”
To summarize, occupational fraud represents a serious problem in society, both in terms of frequency of the fraudulent acts and the resulting damages. Recognizing the elements of these frauds, as well as the typical motivations and red flags exhibited by those who commit them, goes a long way toward the prevention, recognition and resolution of them in the workplace.
William M. Greshak, JD, CFE, CMA, is an Associate Professor in the Finance and Economics Department of Walsh College.
Founded in 1922 and celebrating more than 90 years of business education, Walsh College offers 19 business and related technology degree programs at the bachelor’s and master’s levels that are responsive to student, employer, and community needs. Walsh is a private, not-for-profit institution offering courses and services at locations in Troy, Novi, Clinton Township, Port Huron, and online.
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