One Rotten Apple; Employee Fraud

We’ve heard a lot about the economic troubles which are currently plaguing the world economy and the focus has tended to be on dealing with the external threats to business.  These principally come in the form of protecting revenues, holding on to customers and generally addressing the consequences of an adverse financial climate.

However, one of the risks which can easily be forgotten is that of employee fraud.  Several studies, and the generally perceived wisdom, all point towards a greater tendency for employee fraud during recessionary times.  It is worth reminding ourselves why this is likely to be the case.  The basic analysis of any fraud reveals three critical components – often referred to as the fraud triangle.  These are:

~ Opportunity : the ability to commit fraud

 ~ Pressure : what is there to be gained by committing the fraud – the ability to maintain a lifestyle, funding an addiction?

~ Rationalisation : the justification for committing a fraud

Let us place these three factors into a not uncommon situation.  A senior manager at a financial services business is heavily indebted and is unable to save due to his commitments.  He depends on his annual bonus to ensure that he can pay his children’s school fees but the company for which he works has implemented a pay freeze and withheld bonuses for the year.  At the same time, the company has made redundancies at senior management level and across operational functions.  As a consequence there are fewer controls over payment authorisations and fewer internal control functions generally.  He feels aggrieved at the financial position and believes that he has worked harder than ever before.  He therefore creates false invoices to support claims for business expenses and alters standing data on the purchase ledger system to create a fictitious supplier, the banking details for which are a dummy account over which he has control.  He fully intends reimbursing the company once the financial situation has stabilised.

The above scenario contains all three of the fraud triangle components : The opportunity is greater due to the lack of controls, the pressure (or incentive) is there in the form of the requirement to pay school fees and he has rationalised the fraud on the basis that he feels he is ‘owed’ the money.

Unfortunately, data suggests that once a fraudster has committed one fraud, they are repeated – either because of the thrill of being able to beat the system or for an ongoing need.  However, we may never know the true extent of fraud because it is either not reported once discovered (companies tend not to like headlines associating them with fraud) or simply undiscovered.  Keeping an eye out for the tell tale signs of fraud is essential – its discovery can have a seriously negative impact with all stakeholders : Staff, clients (both existing and prospective) and the regulator.  Reducing the pressures from each of the three components of the fraud triangle should be an objective of all businesses.

Ed Shorrock is the Director of Forensic & Regulatory Services at BakerPlatt ( www.bakerplatt.com ), an offshore law firm specialising in litigation, financial crime, regulatory and insolvency matters.  Ed has been heavily involved in a variety of regulatory, criminal and civil actions with a focus on the restraint, custody, realisation and confiscation of assets. Having qualified as a chartered accountant in 1998, Ed has managed a range of projects involving asset seizures under drug trafficking and criminal legislation and been involved in regulatory investigations and complex liquidations. He delivers on training programmes focusing on financial crime and compliance issues and is a regular speaker at conferences on these topics and how they affect offshore financial centres.

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