fraudsters whom I have had the pleasure of investigating and interacting with, for supplying me with the reasons for writing this work. Last but not least, I would like to thank my family, who provided unwavering support, encouragement, patience, and silence throughout the gestation period and writing and production life cycle of the development of this book.
Part I
Occupational Fraud and Corruption
Chapter 1
Introduction to Occupational Fraud and Corruption and Recent Trends
WHEN I STARTED WRITING THIS BOOK, I considered jumping in at the deep end and commenced rapidly making notes of the various approaches to profiling by compiling a list, based on my 20 or so years of experience in the fraud investigation field, of exactly what, when profiled, would be of use to the fraud investigator. Yes, there is the behavior of the convicted fraudster to understand as well as his modus operandi, but what about which industry type or department he is likely to work in, his likely position within the organization, the likely geographical location, economic environment, and personal circumstances? We also need to understand the profile of higher risk victim organizations and their characteristics. Anyway, I quickly realized that to fully understand the subject of profiling we first need to have a fairly good grounding in or understanding of the subject of fraud and corruption – what it is and how it affects organizations and all of us who are associated with those organizations. It is also, possibly even more so, very important to understand the types of controls that are designed, put in place, and often bypassed to enable us to manage fraud risk in organizations. After all, fraud is perpetrated by human beings as a reaction to opportunities created by weak safeguarding processes. Profiling is a further antifraud methodology to add to the stable, and it does require an understanding of how and where in the corporate environment it would best sit. After all, you would not bring in a new team member without first ensuring a good fit or put a new thoroughbred into a stable to share with other horses without first having an understanding of those neighbors and what makes them kick. So, let's have a look at the world of fraud and corruption and how, since time immemorial, we appear to be failing in our attempts to manage fraud risk in the organizational environment.
Deception through Breaching Trust
The term fraud has come to encompass many forms of misconduct. Although the legal definition of fraud is very specific, for most people like you and me, antifraud professionals, regulators, the media, and the general public alike, the common use of the word is much broader and generally covers any attempt to deceive another party to gain a benefit. Expense fraud, forgery, counterfeiting, identity theft, theft of inventory by employees, manipulated financial statements, insider trading, Ponzi schemes, mortgage fraud – the range of possible fraud schemes is actually endless but at their core all involve a violation of trust. It is this violation that, perhaps even more than the resulting financial loss, makes such crimes so harmful. For businesses to operate and for commerce to flow freely, organizations must entrust their employees with resources and responsibilities. So when an employee defrauds his or her employer, the fallout is often especially harsh. The focus of this book is occupational fraud schemes in which an employee abuses the trust placed upon him or her by an employer for personal gain. The formal definition of occupational fraud, taken from the Association of Certified Fraud Examiners (ACFE) website, http://www.acfe.com/fraud-101.aspx is
the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets.
While this occupational fraud category is but one facet of the vast overall fraud universe, fraud in the workplace is huge and covers a wide range of employee misconduct. It is, without doubt, a material threat faced by all organizations and their employees worldwide.
Global Trends in Occupational Fraud
The Association of Certified Fraud Examiners (ACFE), a leading professional body of fraud examiners, has undertaken extensive research into the costs and trends relating to occupational fraud schemes. The findings of the ACFE's initial research efforts were released in 1996 in the first Report to the Nations on Occupational Fraud and Abuse, with subsequent reports released in 2002, 2004, 2006, 2008, and 2010. The ACFE's 2012 Report to the Nations on Occupational Fraud and Abuse, now carried out every two years, provides an analysis of 1,388 fraud cases investigated worldwide by qualified fraud examiners and continues a tradition of shedding light on trends in the characteristics of fraudsters, the schemes they perpetrate, and the organizations being victimized. The ACFE findings truly reflect global trends in occupational fraud and abuse and are invaluable in keeping us abreast of the fraud disease.
The goals of these reports have been to
• Summarize the opinions of experts on the percentage of organizational revenue lost to all forms of occupational fraud and abuse.
• Categorize the ways in which occupational fraud and abuse occur.
• Examine the characteristics of the employees who commit occupational fraud and abuse.
• Determine what kinds of organizations are victims of occupational fraud and abuse.
Each version of the report has been based on detailed information about fraud cases investigated by certified fraud examiners (CFEs). Each new edition expands and modifies the analysis contained in the previous reports to reflect current issues and enhance the quality of the data that is reported. This evolution has allowed the release of increasingly meaningful information from the experiences of CFEs and the frauds that they encounter.
Fraud, like many other crimes, can be explained by the existence of the following four key drivers:
1. A supply of motivated, pressurized, or incentivized offenders.
2. The absence of capable guardians and policing, or weaknesses in control systems, opening up an opportunity.
3. Rationalization in the fraudster's mind bringing about justification for his actions in exploiting the opportunity to satisfy the motivation.
4. The availability of suitable victim organizations.
The motivation, pressure, or incentive to defraud may be as simple as financial need or greed or anything from unrealistic deadlines and performance goals to personal vices such as gambling or drugs.
The opportunity to commit and conceal fraud is really the only element over which an organization has significant control. The opportunity is an open door to solving a nonshareable problem by violating a position of trust and is generally provided through weaknesses in the internal controls. Some examples of weak internal controls include but are by no means limited to absent or inadequate procedures surrounding the following:
• Supervision and review.
• Segregation of duties.
• Management approval and delegation of authority.
• System controls.
Rationalization is a crucial component because most people need to reconcile their behavior with the commonly accepted notions of decency and trust. Some examples of justifications for their actions given by fraudsters I have met include the following:
• “I really need this money, and I'll put it back when I get my salary at the month's end.”
• “I'd rather have the company on my back than the tax people.”
• “Everyone else is doing it.”
• “I just can't afford to lose everything I have worked for – my home, car, everything.”
The availability of a suitable victim organization is an easy one. It is more often than not the fraudster's employer, with whom he has built up a relationship of trust, quite often over many years.
The ACFE 2012 Report to the Nations on Occupational Fraud and Abuse analyzes statistics from fraud cases investigated worldwide to gain an understanding of the characteristics of fraudsters, their schemes, and the types of organizations being targeted. Throughout the report, the statistics