Contributed by: Patrick Didas, Associate Director, IACA
When it comes to measuring the cost of fraud in the United States, the Association of Certified Fraud Examiner’s (ACFE) 2010 Report to the Nations on Occupational Fraud and Abuse (the Report) estimates that “a typical organization loses 5% of its annual revenue to occupational fraud.” The definition of occupational fraud is “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”
Interestingly, the statistic included in the Report appears to only pertain to fraud; they fail to mention abuse, which is clearly mentioned in the title of the Report. Abuse is likely as costly and surely happens much more frequently than fraud. In my experience, however, professional publications fail to appropriately define and measure occupational abuse. Whereas articles and guidance on fraud are abundant, relatively little information is available on the topic of financial abuse. Perhaps this is because abuse is much more of a gray area.
Abuse can be considered more as bending the rules than breaking them. The ACFE’s founder, Joseph Wells, stated in a 1996 article that “the line between fraud and abuse is a fine one.” He states that for an activity to be considered fraud, it must have all 4 of the following attributes:
The activity is clandestine (executed in secrecy or concealment).
The activity is committed for the purpose of direct or indirect financial benefit to the employee.
The activity violates the employee's fiduciary duties to the organization.
The activity costs the employing organization assets, revenues or reserves.
For an activity to be considered abuse, only the last two criteria need to be in place. As you can see, the commonalities between fraud and abuse are that they both violate the employee’s fiduciary responsibilities and result in costs to the employer. Avoiding abuse of RIT funds is as simple as being a better steward of the funds. A “good steward” does what is in the best interest of RIT (being a responsible fiduciary).
A good litmus test of whether something is a potential abuse of RIT’s funds is to consider the following - would you feel comfortable walking up to a student on the Quarter Mile and saying “guess what my department just spent some of your tuition dollars on?” If the thought of that makes you feel uncomfortable, then maybe the expenditure is not a wise one. Think about this example as you carry out your stew-ardship responsibilities. Abuse really goes toward the idea of excessiveness. As you consider departmental financial outlays, ask yourself these questions: “Do I (we) really need it?” and “What would I choose if I had to pay for it from personal funds?”
Fraud is a crime that requires the fraudster to have the opportunity to commit the crime (usually due to poor internal controls), to rationalize in their minds that the crime is worth the risk taken, and to have some sort of pressing financial need. When these factors are aligned, fraud can be difficult to prevent and detect. However, abuse is much more obvious and can often be prevented if the stewards of the funds were to simply “do the responsible thing” and make choices and decisions that are in the best financial interest of RIT. Let’s not be satisfied with the statement, “well at least it’s not fraud.”