Transcript Slide 1
The Psychology of Fraud What Makes an Employee Cross the Line? Joint ACFE/ISACA CPE Event — February 19, 2009 Doug Betts, CFE, CPA Fraud Theories 101 •Theory of Differential Association—Criminal behavior is learned; 1939 Edwin H. Sutherland’s Principles of Criminology. • Social Control Theory—Travis Hirschi’s 1969 Causes of Delinquency - The more an individual strays from social institutions (schools, parents, peers) the more likely criminal behavior will happen. •Differential Reinforcement Theory—Revision of Sutherland’s idea of learned behavior. Behavior is controlled by the stimuli that follow the behavior, i.e., operant conditioning. Summarized by Ronald Akers in a 1977 work, Deviant Behavior: A Social Learning Approach. The Fraud Triangle – Why Fraud is Committed Dr. Donald R. Cressey—1953 Study of Embezzlers • Student of E.H. Sutherland at Indiana University in the 1940’s • PhD dissertation was a study of more than 200 individuals convicted of embezzlement • Termed them “trust violators” • Research published in Other People’s Money: A Study in the Social Psychology of Embezzlement. The Fraud Triangle – Why Fraud is Committed Dr. Donald R. Cressey—1953 Study of Embezzlers “Trusted persons become trust violators when they conceive of themselves as having a financial problem that is non-shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions on themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.” The Fraud Triangle – Why Fraud is Committed Propensity To Commit Fraud Non-sharable Financial Pressure Other Theories – Why Fraud is Committed Desire to Maintain a Positive SelfConcept Motivation for Personal Gain Propensity To Commit Fraud Individuals balance two competing desires in deciding to commit fraud Hypermotivation Theory of Fraud Some authors argue that other theorists pay too little attention to the role of motivation—that it is the more important side of the dishonesty equation. Many real-world acts of dishonesty have a striking pattern of similarity; that is that most perpetrators appear to be motivated by the desire to avoid (or recoup) losses rather than the simple desire for gain. The authors of this theory propose that perceiving oneself “in a hole” leads to hypermotivation—a visceral state that leads one to take actions that would normally be considered unacceptable. Hypermotivation Theory of Fraud The fear of loss is much greater than the pleasure of potential gains. Motivation to avoid loss is 2-3 times greater than the motivation to obtain a gain of equivalent value. Example: Individuals are much more likely to cheat on their tax returns to avoid paying than they are to increase a refund they are already entitled to receive. Predispositions to Fraud Gwynn Nettler has provided some useful insights into those characteristics that can predispose a person to wrongful behavior. Low self-esteem. Psychopaths and sociopaths. Arrogance and egocentricity. A poorly developed code of ethics. Emotional instability. A desire to beat the system. Taking pleasure in manipulating others Predispositions to Fraud Research published by Philip Kropatkin and Richard Kusserow on the atrisk employee identified a range of circumstances that may place a person in a high-risk corruption category. These include – Those with alcohol and drug abuse or other emotional or personal health problems. Those with extramarital sexual involvements. Those experiencing marital and/or family discord. Those involved in excessive speculation/gambling. Predispositions to Fraud Continued – Those who routinely borrow from colleagues. Those who exhibit personal feelings of resentment. Those who suffer from excessive peer pressure and have unrealistic social expectations. Those confronted with personal, family and community expectations that cannot be met, leading to frustration. Those with unrealistic ambition Motivators for Fraud Experience has shown that those who become corrupt may – Feel frustrated or dissatisfied about some aspect of their job. Feel frustrated or dissatisfied about some aspect of their personal life that is not job related. Feel abused by the employer and want to get even. Believe a friend at work has been subjected to a humiliation or abuse or has been treated unfairly. Feel that beating the organization is a challenge as much as a matter of economic gain. Consider that they were economically, socially or culturally deprived during childhood and compensate for this void felt in their personal life and seek affection and friendship through collusion. Motivators for Fraud Experience has shown that those who become corrupt may – Subscribe to the myth that: "The organization is so big, stealing a little bit won't hurt it.“ Believe that: "Everyone else steals, so why not me?“ Consider the organization's internal controls to be lax and are therefore easy to subvert Believe that few have ever been prosecuted for minor corruption in the organization and so the risk and consequences are no deterrent. Fail to consider the consequences of being caught Traits of Embezzlers Often work their crimes alone Tend to be compulsive, spend money freely or gamble or are substance dependent Are often liked by management because they work quietly, hard and for long hours Rationalize their thefts by thinking that they are merely borrowing Tend to be recidivists Exploit weaknesses in internal controls to cover the crime Have ready access to cash or assets Start small and grow in daring. The Typical Perpetrator Usually a first-time offender (nearly 87% have no prior charges or convictions.) Tend to work alone (64%) Males (59%) Median loss: $250,000. Females (41%) Median loss: $110,000. Education of the Perpetrators Source: ACFE 2008 Report to the Nation Education of the Perpetrators Source: ACFE 2008 Report to the Nation Effect of Age of the Perpetrator Source: ACFE 2008 Report to the Nation Effect of Age of the Perpetrator Source: ACFE 2008 Report to the Nation Effect of Position of the Perpetrator - Frequency Source: ACFE 2008 Report to the Nation Effect of Position of the Perpetrator - $ Loss Source: ACFE 2008 Report to the Nation Effect of Annual Income of the Perpetrator Source: ACFE 2008 Report to the Nation Effect of Tenure of the Perpetrator Source: ACFE 2008 Report to the Nation Red Flags of Fraud Source: ACFE 2008 Report to the Nation Background, Criminal, & Credit Checks More than half of the victim organizations in our study conducted a background check on the employment history of the fraudster, and 40% ran a criminal background check on the employee prior to hiring. Background, Criminal, & Credit Checks Unfortunately, the effectiveness of background checks in preventing fraud is limited. •The vast majority of employees who commit occupational fraud are firsttime offenders. •In 87% of the cases, the perpetrator had never been charged with or convicted of a fraud-related offense prior to the discovery of his or her scheme. •Additionally, 83% of the fraudsters had never previously been punished or terminated by an employer for fraud or abuse. In Their Own Words: Convicted Felons Speak Contact Information Doug Betts, CFE, CPA, Inc. 324 Wauconda St., SW Hartville, OH 44632 (330) 571-5871 [email protected] www.dougbettscfecpa.com