Transcript Reducing Fraud With Improved Internal Controls

Fraud Theories
Dr. Raymond S. Kulzick, CPA, CFE
St. Thomas University
Miami, Florida
Copyright 2004 R. S. Kulzick
Fraud Theories




Sutherland – White Collar Crime
Cressey – Fraud Triangle
Albrecht – Fraud Scale
Hollinger - Clark Study
Edwin H. Sutherland

1939 First defined “white-collar crime”
– Criminal acts of corporations
– Individuals in corporate capacity

Theory of differential association
– Crime is learned
– Not genetic
– Learned from intimate personal groups
Cressey’s Offender Types

1. Independent businessmen
– “Borrowing”
– Funds really theirs

2. Long-term violators
– “Borrowing”
– Protect family
– Company cheating them
– Company generally dishonest
Cressey’s Offender Types

3. Absconders
 Take the money and run
 Usually unmarried, loners
 Blame “outside influences” or “personal
defects
The Fraud Triangle
PRESSURE
OPPORTUNITY
RATIONALIZATION
Nonsharable Problems






Violation of ascribed obligations
Personal failures
Business reversals
Physical isolation
Status gaining
Employer-employee relations
Pressure




Financial
Vice
Work-related
Other
Opportunity

Controls
– Environment
– Accounting
– Procedures





Performance quality
Discipline perpetrators
Access to information
Ignorance, apathy, incapacity
Audit trail
Rationalization





They owe me
Borrowing
Nobody will get hurt
I deserve more
It’s for a good purpose
W. Steve Albrecht
Nine motivators of fraud
1.
2.
3.
4.
5.
Living beyond means
Overwhelming desire for personal gain
High personal debt
Close association with customers
Pay not commensurate with job
W. Steve Albrecht
Nine motivators of fraud
6.
7.
8.
9.
Wheeler-dealer
Strong challenge to beat system
Excessive gambling
Family/peer pressure
The Fraud Scale

Situational pressures
– Immediate problems with environment
– Usually debts/losses

Perceived opportunities
– Poor controls

Personal integrity
– Individual code of behavior
The Fraud Scale
Hollinger-Clark Study




Hollinger-Clark study (1983)
Surveyed 10,000 workers
Theft caused by job dissatisfaction
True costs vastly understated
Employee Deviance

Two categories:
– Acts against property
– Production violations (goldbricking)

Strong relationship: theft and concern
over financial situation
Age and Theft




Direct correlation
Younger employees less committed
But, higher position = bigger theft
Opportunity is only a secondary factor
Job Satisfaction and
Deviance

Dissatisfied employees
– More likely to break rules
– Regardless of age/position
– Trying to right perceived inequities

Wages in kind
Organizational Controls


Some impact, but limited
Hollinger studied five aspects:
– Company policy
– Selection of personnel
– Inventory control
– Security
– Punishment
Hollinger’s Conclusions



Employee perception of controls is
important
Increased security may hurt, not help
Employee-thieves exhibit other deviance
– Sloppy work, sick leave abuses, etc.


Management should be sensitive to
employees
Pay special attention to young employees
Hollinger’s Conclusions
Four key aspects of policy development
1. Understand theft behavior
2. Spread positive info on company
policies
3. Enforce sanctions
4. Publicize sanctions
Overall Conclusion 1


Perpetrators feel justified
Must counter this
– Morally
– Legally
– Consequences
Overall Conclusion 2

Concept of wages-in-kind
– Hire the right people
– Treat them well
– Have reasonable expectations
Overall Conclusion 3



Controls must pose a visible and highly
likely threat of apprehension
– Perception of detection is the
greatest deterrent
Hidden controls do not deter
Controls cannot be predictable