Although there is no one definition for fraud, the Collins English dictionary defines it as “deliberate deception, trickery or cheating intended to gain an advantage”. It is considered an illegal act and it is characterized by deceit, concealment and violation of trust. The most common examples of fraud include embezzlement, misappropriation, or misapplication of funds and/or property; forged signatures on cheque books or cash related documents; and alteration or falsification of documents or computer files.
It is upsetting then when you consider that most occupational fraud is committed by trusted employees. That is employees with long service who are trusted by management and know where the weaknesses exist. They often are first-time offenders never having been charged or convicted of a fraud-related offence and never having been disciplined or terminated by an employer for fraud-related conduct.
Before getting into particulars, it may be helpful to first consider what factors must be present for the ordinary employee to commit fraud. One classic model used to represent this is the so called Fraud Triangle associated with the American criminologist Donald R. Cressey. Cressey claimed that three elements needed to be present opportunity, motivation and rationalisation.
Opportunity is typically caused by the absence of sufficient internal controls. Motivation can include financial need, resentment towards one’s employer, addictions and pressure to achieve. For example, people can be motivated to commit fraud because of their personal perilous financial situation, even if they do not feel a strong grievance towards their employer. The third element, rationalisation, occurs when the perpetrator can reason to themselves that they are not doing something wrong. For example, they might be intending to repay the money.
The obvious way to reduce the opportunity for your employees to commit fraud is by improving your internal controls, for example, through management oversight and ensuring that no single individual has excessive financial power or control. You can reduce the motivation of employees to commit fraud through such means as providing an employee assistance programme that helps employees that are experiencing significant stress. You can have a strategic focus on increasing employee engagement a focus that informs your decision-making. This work could include periodically surveying your employees. This focus on engagement has the benefit of reducing the chances of an employee being tempted to commit fraud. You can also ensure that your financial goals, though challenging, are achievable without your people feeling extreme pressure.
This may seem blindingly obvious to you but do your employees actually know what fraud is? Do they know that committing it is contrary to the terms of their employment? Do they grasp that if they commit fraud that they may be putting jobs in jeopardy?
You may have an organisational information deficit that needs remedying. The way to address this is to ensure that your organisation has established clear policies and procedures that your employees are aware of those policies and procedures, and that management create a culture that expects and models honesty.