The Quaestor - Volume 4, Issue 2

In These Times, Be Vigilant

Contributed by: Patrick Didas, Associate Director, Institute Audit, Compliance & Advisement

Vigilant is derived from the Latin word vigilare - to keep watch, stay awake. I find this word origin to be very fitting because I can attest that in most of the instances of fraud that I have investigated, the fraud scheme was compounded by the fact that a manager was not as ”awake” from a fiscal responsibility sense as they should have been.

In this economic recession, everyone needs to be more aware of internal controls and the potential for fraud. We know that most employees are honest; however, research shows that even honest people sometimes cross the line. According to the Association of Certified Fraud Examiners (ACFE) survey data, nearly 88% of fraudsters who get caught have no prior criminal record. In any organization, management must pay attention to the very real risk that some people within their organizations will at one point or another commit fraud. The question becomes why do they do it?

The research of Professors Richard C. Hollinger, formerly of Purdue University, and John P. Clark, of the University of Minnesota, has been cited by ACFE founder Joseph Wells in his Corporate Fraud Handbook, which states that “all age groups of employees who are dissatisfied with their jobs…are the most likely to seek redress through counterproductive or illegal behavior in order to right the perceived inequity.” What does this mean? An organization can have great internal controls, anti-fraud audit procedures, and monitoring procedures in place, but a sufficiently alienated employee will try to steal from, cheat, or sabotage the organization.

Interestingly, the researchers published their work in 1983. In today’s economy, its conclusions seem more appropriate than ever because there has never been as great a sense of employee disenfranchisement and disaffection toward the organizations that employ them. One example of this is the shorter tenure that people have with employers nowadays.

The Fraud Triangle, a fraud motives concept dating to the 1940’s, states that a fraud can occur when the right pressure, opportunity and rationalization exists. In recent years, there has been discussion of a theory that the triangle should become a diamond with the fourth motive for committing fraud being the sense of employee alienation and disenfranchisement. This is attributable to the “layoff culture” of a poor economy that is fueled by the accelerated disappearance of pay increases, benefits, foreign outsourcing, and increasingly stressful workloads.

In a layoff culture, some employees may react to this by working harder than ever in an attempt to improve their chances of being spared by the next round of downsizing. But other employees may start to slack off, look elsewhere for employment, and/or start stealing from the organization. The bottom line is that when employees are made to feel disposable, they are apt to develop a self-preservation mentality. They lose all sense of “belonging” to the community and may start to focus on “looking out for number one.”

I know this sounds gloomy, but the positive side in Hollinger and Clark’s research is that “…a lowered prevalence of employee theft may be one valuable consequence of a management team that is responsive to the current perceptions and attitudes of its workforce.” I think this can be said for RIT. Remember, to mitigate internal fraud risk, organizations must conduct regular risk assessments, implement effective controls, and be aware of changes in employee behavior.

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