Perry Maddox explores the motivations for people to commit fraud and explains how to spot and stop fraud before it sinks the ship.
“Perry, please help me with my computer… NOW!”
With those words, I dashed up the stairs to help a family member.
Flashing across the screen was a compelling security warning. Your system has been compromised by malware, act now to fix the problem before personal information is stolen.
Urgent, urgent, urgent.
“Don’t touch the keyboard,” I exhaled, “this is fraud.”
Is there Fraud in Your Team?
I have a simple question for you, leaders.
Is anyone in your team, organization or system stealing resources or committing fraud?
It’s an important question, and there’s only one wrong answer.
If someone answer ‘no,’ alarm bells should ring.
That’s because fraud is far more widespread than you might think. The Association for Certified Fraud Examiners estimates that organizations lose 5% of revenues globally to fraud. That means it is happening, somewhere, all the time. And it happens at all levels, with lower level employees committing fraud most often and executives committing the most expensive fraud.
Instead of answering “no” because you don’t know of any fraud, assume that it can and will happen to you. Anything less invites trouble.
Fraud happens.
Here’s why.
Understand why Fraud Happens.
Most fraudsters aren’t career criminals. They’re mostly normal people.
So why do they steal?
Dr. Donald Cressey identified three factors present when people commit financial crimes:
- Pressure. Financial troubles in somebody’s life, such as big debts, often motivate them to perpetrate fraud. Alternatively, the pressure can be aspirational, such as a desire for a better lifestyle. When there’s no legitimate way to resolve this pressure – like a bank loan – that’s a risk factor.
- Opportunity. When someone perceives an opportunity for theft that won’t be discovered, that’s a key fraud risk factor.
- Rationalization. Finally, people will rationalize their actions. “I’m not a bad person, just in a jam” or “I’ll return the money later,” or ” if they only paid me more, I wouldn’t have to do this.” For most normal people to cross the line into criminality, they must first rationalize their behaviour.
Those three pillars form the Fraud Triangle.
Once you understand “why,” you know what to look for.
How to Spot Fraud Risk at Work.
Here are a few common risks to watch for:
- Under Pressure. Do you have individuals under particular financial pressure? Maybe they know they’re about to lose a job, or perhaps a partner lost a job. Debt problems, drugs and gambling are common triggers.
- Putting You Under Pressure. I knew the computer warning was fraudulent because it pressured the user to make a fast decision. Fraudsters don’t want you to have time to think. When you are pressured to sign off financials, give details or or make decisions quickly, beware. Slow it down and step away.
- Weak Controls. Strong control systems reduce opportunity. But if you don’t have segregation of financial duties, regular audits, spot checks, reconciliations, and a way for employees to report concerns, you may be gifting a fraudster the opportunity they need.
- Bad Habits & Messy Work. Do your management teams run regular variance analysis and reconciliations? If so, great, but check the detail on occasion. Are the variance reports well filled out, or do they lack explanations for large variances? Do the cash counts, reconciliations, and checks happen to be in the same handwriting? Are journals hard to follow due to many corrections? In a strong control system, fraud is hard to perpetrate, but it’s only a strong system if staff execute it well. Look for where they don’t.
- Weird Hours. Do you have an accountant who never takes leave? A bookkeeper who works hours when others aren’t around? Many fraudsters work this way to prevent others from discovering them while they’re away.
- Morale. Are your people happy and engaged, or do they resent leadership and feel they’re underpaid?
- Big Lifestyle Changes. Has someone become wealthy with no explanation?
You Got This.
Leaders can’t be naïve about fraud risk.
Strong controls, strong bonds in your team, staff training, and vocal leadership are everything. Regularly speaking publicly about fraud with all your teams and training them to spot and report risk will go a long way.
But fraud does happen.
If you’re ever unsure, remember that where’s there’s smoke, there’s often fire. Don’t leap to conclusions, but if in doubt, ask or act. Set in motion your organizational system to investigate concerns. If you don’t have such a process, reach out to a trusted advisor for help.
As you train yourself to look for the factors behind fraud, you’ll become confident in spotting the risk.
Even when the computer is screaming “urgent, urgent, urgent.”
