Fraud TheoriesFraud Theories

Dr. Raymond S. Kulzick, CPA, CFEDr. Raymond S. Kulzick, CPA, CFESt. Thomas UniversitySt. Thomas University

Miami, FloridaMiami, Florida

Copyright 2004 R. S. KulzickCopyright 2004 R. S. Kulzick

Fraud TheoriesFraud Theories

Sutherland – White Collar CrimeSutherland – White Collar Crime Cressey – Fraud TriangleCressey – Fraud Triangle Albrecht – Fraud ScaleAlbrecht – Fraud Scale Hollinger - Clark StudyHollinger - Clark Study

Edwin H. SutherlandEdwin H. Sutherland

1939 First defined “white-collar 1939 First defined “white-collar crime”crime”– Criminal acts of corporationsCriminal acts of corporations– Individuals in corporate capacityIndividuals in corporate capacity

Theory of differential associationTheory of differential association– Crime is learnedCrime is learned– Not geneticNot genetic– Learned from intimate personal groupsLearned from intimate personal groups

Cressey’s Offender Cressey’s Offender TypesTypes

1. Independent businessmen 1. Independent businessmen – ““Borrowing”Borrowing”– Funds really theirsFunds really theirs

2. Long-term violators2. Long-term violators– ““Borrowing”Borrowing”– Protect familyProtect family– Company cheating themCompany cheating them– Company generally dishonestCompany generally dishonest

Cressey’s Offender Cressey’s Offender TypesTypes 3. Absconders3. Absconders

Take the money and runTake the money and run Usually unmarried, lonersUsually unmarried, loners Blame “outside influences” or Blame “outside influences” or

“personal defects“personal defects

The Fraud TriangleThe Fraud TrianglePRESSURE

OPPORTUNITY RATIONALIZATION

Nonsharable ProblemsNonsharable Problems

Violation of ascribed obligationsViolation of ascribed obligations Personal failuresPersonal failures Business reversalsBusiness reversals Physical isolationPhysical isolation Status gainingStatus gaining Employer-employee relationsEmployer-employee relations

PressurePressure

FinancialFinancial ViceVice Work-relatedWork-related OtherOther

OpportunityOpportunity

ControlsControls– EnvironmentEnvironment– AccountingAccounting– ProceduresProcedures

Performance qualityPerformance quality Discipline perpetratorsDiscipline perpetrators Access to informationAccess to information Ignorance, apathy, incapacityIgnorance, apathy, incapacity Audit trailAudit trail

RationalizationRationalization

They owe meThey owe me BorrowingBorrowing Nobody will get hurtNobody will get hurt I deserve moreI deserve more It’s for a good purposeIt’s for a good purpose

W. Steve AlbrechtW. Steve Albrecht

Nine motivators of fraudNine motivators of fraud1.1. Living beyond meansLiving beyond means

2.2. Overwhelming desire for personal Overwhelming desire for personal gaingain

3.3. High personal debtHigh personal debt

4.4. Close association with customersClose association with customers

5.5. Pay not commensurate with jobPay not commensurate with job

W. Steve AlbrechtW. Steve Albrecht

Nine motivators of fraudNine motivators of fraud6.6. Wheeler-dealer Wheeler-dealer

7.7. Strong challenge to beat systemStrong challenge to beat system

8.8. Excessive gamblingExcessive gambling

9.9. Family/peer pressureFamily/peer pressure

The Fraud ScaleThe Fraud Scale

Situational pressuresSituational pressures– Immediate problems with Immediate problems with

environmentenvironment– Usually debts/lossesUsually debts/losses

Perceived opportunitiesPerceived opportunities– Poor controlsPoor controls

Personal integrityPersonal integrity– Individual code of behaviorIndividual code of behavior

The Fraud ScaleThe Fraud Scale

Hollinger-Clark StudyHollinger-Clark Study

Hollinger-Clark study (1983)Hollinger-Clark study (1983) Surveyed 10,000 workersSurveyed 10,000 workers Theft caused by job Theft caused by job

dissatisfactiondissatisfaction True costs vastly understatedTrue costs vastly understated

Employee DevianceEmployee Deviance

Two categories:Two categories:– Acts against propertyActs against property– Production violations (goldbricking)Production violations (goldbricking)

Strong relationship: theft and Strong relationship: theft and concern over financial situationconcern over financial situation

Age and TheftAge and Theft

Direct correlationDirect correlation Younger employees less Younger employees less

committedcommitted But, higher position = bigger theftBut, higher position = bigger theft Opportunity is only a secondary Opportunity is only a secondary

factorfactor

Job Satisfaction and Job Satisfaction and DevianceDeviance Dissatisfied employeesDissatisfied employees

– More likely to break rulesMore likely to break rules– Regardless of age/positionRegardless of age/position– Trying to right perceived inequitiesTrying to right perceived inequities

Wages in kindWages in kind

Organizational Organizational ControlsControls

Some impact, but limitedSome impact, but limited Hollinger studied five aspects:Hollinger studied five aspects:

– Company policyCompany policy– Selection of personnelSelection of personnel– Inventory controlInventory control– SecuritySecurity– PunishmentPunishment

Hollinger’s Hollinger’s ConclusionsConclusions

Employee perception of controls is Employee perception of controls is importantimportant

Increased security may hurt, not helpIncreased security may hurt, not help Employee-thieves exhibit other devianceEmployee-thieves exhibit other deviance

– Sloppy work, sick leave abuses, etc.Sloppy work, sick leave abuses, etc.

Management should be sensitive to Management should be sensitive to employees employees

Pay special attention to young employeesPay special attention to young employees

Hollinger’s Hollinger’s ConclusionsConclusions

Four key aspects of policy Four key aspects of policy developmentdevelopment

1.1. Understand theft behaviorUnderstand theft behavior

2.2. Spread positive info on company Spread positive info on company policiespolicies

3.3. Enforce sanctionsEnforce sanctions

4.4. Publicize sanctionsPublicize sanctions

Overall Conclusion 1Overall Conclusion 1

Perpetrators feel justifiedPerpetrators feel justified Must counter thisMust counter this

– MorallyMorally– LegallyLegally– ConsequencesConsequences

Overall Conclusion 2Overall Conclusion 2

Concept of wages-in-kindConcept of wages-in-kind– Hire the right peopleHire the right people– Treat them wellTreat them well– Have reasonable expectationsHave reasonable expectations

Overall Conclusion 3Overall Conclusion 3

Controls must pose a visible and Controls must pose a visible and highly likely threat of highly likely threat of apprehensionapprehension– Perception of detection is the Perception of detection is the

greatest deterrentgreatest deterrent Hidden controls do not deterHidden controls do not deter Controls cannot be predictableControls cannot be predictable