Dr. Val Farmer
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Rural Mental Health & Family Relationships

Is Someone Stealing From You

May 3, 1999

For this column I interviewed Tom Buckhoff, PhD, CPA and Certified Fraud Examiner. A teacher at ND State University, his consulting business specializes in fraud detection, investigation and prevention.

Abraham Lincoln once had a man offer him a substantial bribe. Lincoln threw the man out of his office. His staff asked him why he was so angry. He replied, "Every man has his price and he was getting close to mine."

Perhaps the reason Lincoln had a reputation for honesty was that he knew he and others were capable of dishonesty under the right circumstances. Many people in society sell themselves cheap while others place a dear price on their integrity.

Fraud in the workplace. Fraud is defined as the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets.

A leading CPA firm's study of the likelihood of theft found that 30 percent of workers will steal, another 30 percent might steal and 40 percent won't steal. The profile of fraud perpetrators differs little from the average person. Fraud costs businesses about 6 percent of their annual revenues. Who commits theft? Fifty-eight percent are employees, 30 percent are managers and 12 percent are owners.

The median loss by owner fraud is $1,000,000, manager fraud is $250,000, and employee fraud is $60,000. The typical profile of a white collar criminal is an older male, a top manager or owner, who is married, well-educated and a repeat offender.

Most of these cases are settled by firing the offender and by out-of-court settlements. Businesses recover more of their losses by civil lawsuits and out of court settlements than by criminal prosecution.

However, unless the offender suffers a substantial penalty or consequence, they continue to escalate his or her fraudulent behavior. By the time an offender is finally prosecuted he or she will have committed six or seven offenses. Buckhoff believes businesses have a social responsibility to prosecute offenders to save people down the line from further harm.

Red flags. When should you be suspicious? Buckhoff identifies these indicators that should alert owners of possible fraud:

  • Employee/manager is protective of books and records
  • Business is inexplicably unprofitable
  • Some financial ratios do not make sense
  • Whited out entries in check register
  • Missing cancelled checks
  • Employee/manager is living an extravagant lifestyle
  • Employee/manager is uncooperative during the investigation.

Why do people commit fraud? Buckhoff describes three basic elements necessary for fraud to occur - opportunity, pressure, and rationalization. Business fraud comes from a combination of opportunity, strong financial pressures and low personal integrity.

  • Opportunity. Opportunity can be real or perceived. Opportunity comes with poor or nonexistent controls with a person who is in a key position of trust within the organization. The most common comment Buckhoff hears from owners, managers or partners is, "I can't believe he would do this. He was my most trusted employee."

People are able to commit fraud precisely because they are trusted. Problems emerge also when owners/managers are unable to judge quality of work, lack access to information, lack an audit trail, or are apathetic. Buckhoff recommends background checks, bonding of employees, written employee agreements, and informing employees about the existence of controls. People who think they will be detected rarely commit fraud.

  • Pressure. The right amount of pressure can cause even honest people to commit fraud. Employees under a lot of pressure should not be exposed to positions of financial temptation. Examples of pressure include: living extravagantly beyond one's means, having personal debt, alcohol, drug or gambling addictions, job dissatisfaction.

Buckhoff stresses that employer's need to know their employees and what is going on in their lives. Honest people are kept honest by not tempting them beyond their ability to withstand temptation. Bonuses, loans or outright gifts are a better way to handle an employee's financial problem than exposure to business assets coupled with inadequate fiscal controls.

Rationalization. The third element for fraud to occur is the ability to rationalize one's behavior. A person committing fraud needs to rationalize the fraud so the fraudulent activities are consistent with his/her personal code of conduct. A disgruntled employee can rationalize that he or she is overworked, underpaid or unappreciated. Theft can be perceived as a way of getting justice or retaliation.

To live with themselves a person has to explain their fraud as OK, that what he or she is doing isn't that wrong. Someone who is prone to excuse making or not taking responsibility for mistakes finds it easier to rationalize the personal use of business resources.

Here are some other common rationalizations. "I'm only borrowing the money; I'll pay it back." "Everyone does it." "I'm not hurting anyone." "It's for a good purpose." "It's not that serious."

To counter rationalizations, Buckhoff suggests having clear policies about employee honesty and such things as long distance phone calls, use of the copier and office supplies, mileage and travel reimbursement, etc. Taking "little" perks can escalate into bigger thefts. When employers pay their employees a fair wage, it reduces both financial pressures and the ability to rationalize. Good employer/employee relationships also make it harder to rationalize behavior.

What is your price? Cheap or dear?