The New Fraud Triangle: Another Dimension in Employee Fraud Motivation By Peter Goldmann Most employees are honest,

or so it seems to many auditors, fraud investigators and security professionals. However, research shows even honest folk sometimes cross the line. In fact, according to ACFE survey data, nearly 88 percent of employee fraudsters who get caught have no prior criminal record. Why You Should Care While it may be difficult to quantify the exact proportion of your (or your clients) employees whom anti-fraud experts would classify as at risk for committing fraud, the ACFEs estimate that U.S. businesses lose more than $660 billion to fraud every year is evidence enough that management must pay attention to the very real risk that some people within their organizationseven some believed to have rock-solid integritywill at one point or another commit fraud. Beyond the Obvious It may be worthwhile restating the obvious: to mitigate internal fraud risk, organizations must conduct regular risk assessments, implement effective controls and continuously monitor employee behavior. Rather less obvious to many in the C-Suite is the central conclusion of the seminal research of Professors Richard C. Hollinger, formerly of Purdue University, and John P. Clark of the University of Minnesota, cited by many, including Joe Wells in his Corporate Fraud Handbook, that all age groups of employees who are dissatisfied with their jobsare the most likely to seek redress through counterproductive or illegal behavior in order to right the perceived inequity. Translation: You can have the great internal controls, super anti-fraud audit procedures and ultra-vigilant monitoring procedures in place, but none of this will deter a sufficiently alienated employee from trying to steal from, deceive or sabotage your organization. The more encouraging observation from Hollinger and Clarks 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. What's Changed? Hollinger and Clark published their work in 1983. Twenty-five years later, its conclusions seem more compelling than ever. Key reason: There has never been as great a sense of employee disenfranchisement and disaffection toward the organizations that employ them than there is today.

The genesis is not hard to identify. Through the early part of the 20th century, in fact well into the 1970s, employees who started their careers at organizationslarge or smalloften stayed with those organizations for the entirety of their working lives. There was an informal yet definitive mutual social contract between employer and employee which dictated that an employees loyalty and commitment to the organization would be rewarded with fair pay, a pension, and above all, unqualified job security. Result: During this period, if a company suddenly announced a downsizing, it was usually due to the introduction of new technology or a breakthrough productivity-enhancing process such as robotic automobile assembly or automation of labor-intensive clerical jobs. Surviving employees typically took the event in stride, lamenting the loss of their less fortunate co-workers, but never doubting the intentions of management. Compare that with todays workplace environment. By 1996, the frequency of major job cuts, along with the addition of the term layoff to the colloquial vernacular, apparently contributed to the U.S. Department of Labors decision to begin collecting statistics on what it endearingly termed mass layoff events." Definition: Mass layoff events are actions involving the firing of at least 50 employees by an individual private-sector employer. Not since October 2000 has there been a month with fewer than 1000 mass layoff events (938), and in May of this year the total number of mass layoff events (1,626) was the third-highest since April, 2003. What it Means for Fraud Fighters The Fraud Triangle certainly remains an essential component of the investigative toolbox of todays financial crime fighters. But now prevention experts are redefining the Fraud Triangle as more of a Fraud Diamond. The fourth dimension of the theory explaining employee motives for committing fraud is the now widespread sense of alienation and disenfranchisement, driven largely by the layoff culture described above and further fueled by the accelerated disappearance of healthcare, pension and other benefits foreign outsourcing of both hourly and salaried jobs and increasingly stressful workloads. Forensic accountant and anti-fraud consultant Yigal Rechtman of the New York firm of Buchbinder Tunick LLP aptly refers to this latter trend as scope creep. He cites the example of a company that had a team of eight IT staff. One of them was exceptionally talented. Some of her co-workers even called her a computer genius. Naturally, because of her outstanding abilities, the company gradually gave her more and more responsibility for technology-related projects. Commensurate pay increases did not, however, follow.

It didnt take long for this valuable employee to begin feeling exploited and taken for granted. While she didnt start stealing from the company for taking advantage of her, this may have been more due to managements good luck in that she was a person of high moral character. An IT wiz of lesser integrity might have decided that if the company was going to exploit her, she would do the same to the company. Notably, this psychological sequence does sound very similar to the Fraud Triangles rationalization component. The critical difference is that in this and similar instances, the fraudster is not motivated by financial pressure. Instead, he or she commits fraud because management has created, intentionally or not, a culture of every man for himself." The Ripple Effect A major part of the Fraud Diamond syndrome is that management too often fails to realize that while slashing a thousand jobs here and a thousand there may serve short-term financial purposes, these moves leave surviving employees with a profound sense of dispensability and insecurity. Result: The stress-inducing concern among remaining employees that they may be next out the door immediately dilutes their workday focus on the tasks at hand in favor of their own financial survival. Some employees may react to this by working harder than ever and honing their skills in office politics in an attempt to improve their chances of being spared by the next round of downsizing. But too many others will start to slack off, look elsewhere for employment and/or start stealing from the organization. Important: This occurs not so much because they are driven to get even with the organization for firing their co-workers, as would be the case with the rationalization component of the Fraud Triangle. Rather, with disenfranchisement and alienation from the organization when employees are made to feel disposable they are apt to develop an urgency for self preservation. They lose all sense of camaraderie and belonging to the community and instead start to focus on looking out for number one. Unfortunately, feeling compelled to fend for oneself in an increasingly hostile work environment makes it easy for some employees to justify exploiting opportunities to commit fraud. They may have no pressure and require no rationalization they may just feel If dont take what I can get now, I may not have another chance later. Key perspective: Not all employees are susceptible to the demoralizing effects of the layoff culture. Many will remain loyal, ethical and committed to quality work no matter what. But management must nonetheless ask itself, Why risk alienating workers and encouraging them to steal from us if we dont have to?

Turning Things Around This increasingly dominant priority on the part of employees to take care of themselves first and their employers second presents a new challenge for management. How, after all, can a wellmeaning organization convince its valued associates that it truly does care about them? That they are not just numbers easily disposed of at the earliest sign of a business downturn. That they do belong to the organizations community and are key contributors to its culture of respect for individuals, commitment to personal advancement and value for family and community. Enter Tone at the Top. This term, used often in the context of Sarbanes-Oxley compliance, has important meaning with regard to the Fraud Diamond. Management is charged with infusing the organizations culture with an attitude of putting people first. Walking this talk means Maintaining an open-door policy on the part of all managers. Establishing and maintaining transparency in major management activities. That requires avoiding secrecy and surreptitiousness in decision-making and ensuring that key decisions result in no surprises or unfair actions affecting employees. Clarity and consistency in communicating with employees. The CEO needs to be out and around the workplace as much as possible. His or her privileges as the ranking officer in the organization must be downplayed. Reorganizing your HR department. Invest in employees with training ad retraining and re-assignment to jobs that provide added challenge and the potential for financial reward. Lesson from one who knows: Former GE chief Jack Welch has often cited these practices as among the most powerful in building and sustaining employee loyalty, commitment and integrity. 2008 White-Collar Crime 101 LLC, All Rights Reserved.

Peter Goldmann Peter Goldmann is Editor and Publisher of the monthly newsletter, White-Collar Crime Fighter, http://www.wccfighter.com.