To understand fraud, we have to
understand what drives people to it. Are some people born to be fraudsters? What
facilitates or motivates people to commit fraud and what can organizations do
to prevent fraud.
In the 1950’s studies by Dr
Donald R Cressey on the behavior of individuals who had embezzled funds lead to
the hypothesis of the Fraud Triangle. The Fraud Triangle holds that there are
three drivers of fraud: opportunity, motivation and rationale. To date the
findings of Cresseys study still hold. An additional driver or facilitator has
been identified as capability. According to KPMG’s 2014 study Global profile of a fraudster, People commit fraud when
three elements occur simultaneously, the perfect storm; motivation, opportunity
and ability to rationalize the act. In almost all cases, this explains why the
fraud occurs and why a particular type of person becomes a fraudster.
Every professional involved in
fraud examiners should understand the fraud triangle as a starting point in understanding
fraud.
To understand the fraud triangle
consider the following example. James is the Head of Finance for a Savanna
Holdings. Savanna Holdings deals with purchase and sale of premium animal feed
in Kenya. The animal feeds are imported from Denmark. Savanna holds all its
stock in a warehouse in Nairobi from where dispatches to customers are done. As
the Head of Finance James is in charge of the warehouse, the finance
department, logistics and administration. James Joined Savanna as an intern in the
warehouse department. Over the course of his 17 years employment at Savanna, he
has worked in the logistics department, administration department and in
internal audit. Most of the policies, procedures and controls in place at
Savanna were developed while James was an employee. During last year’s Audit by
Milestone Associates – CPA, the auditors recommended that a detailed
investigation be performed on the company’s inventory records and non
performing debtors.
Momentum Advisory – CFE conducted
the investigation. Their findings were that James in collusion with other
employees had defrauded the company Kshs 170 million – (approx. USD 2million). The fraud had taken place for the last three
years. The investigation also found the following:
·
That James had divorced his wife and the court
had ruled that about 50% of his wealth be transferred to his wife. In addition
he was required to pay child support of Kshs 150,000 per month.
·
James was the overall authority in approval of
all credit sales, signing off of inventory records at the end of year, signing
off of bank reconciliations.
·
The ownership of Savanna had overlooked in the appointment
of a new CEO four years ago.
The theoretical case above
provides an example of how cases of fraud will exhibit the three drivers
mentioned in the fraud triangle.
Opportunity and Capability
People who have stayed in the
organization long enough have gained trust of the organizations. In addition,
they understand the controls of the organization. In this case James has worked
in the organization for 17 years, he has worked in virtually all departments
that now report to him. At his position no member of staff can question his
actions. These circumstances have created the opportunity for him to commit
fraud. It’s like leaving the safe unlocked just because you trust your colleagues.
The open door is the opportunity.
Motivation and pressure
James was recently divorced, he
also has child support to take care of. These circumstances have created
pressure on James to find alternative ways of raising his income. Fraud like
any other crime requires motivation, this could be greed, financial gain or financial
difficulty. For someone at James level, it could be difficult to observer
aspects of greed. If
James an expensive car, nobody would think about it too much given his position
of CFO.
Rationale
Fraudsters, as with other types
of criminals, will frequently provide a rationale for their deeds. For example
in James case, he may feel that he is getting even with the organization for
overlooking him in their search for a CEO. James may also feel that he is
superior enough not to play by the rules of the company.
Although the above case is theoretical,
I have seen similar cases in my investigations over the years. Opportunities
for fraud are many depending on the type of organization. Organizations need to
be vigilant to ensure that controls are tight enough and oversight is strong enough
to identify where such might occur.
Recognizing these drivers may
assist organizations reduce fraud. Internal controls and trust is good, but
recognizing that you are dealing with or relying on human element may enable an
organization prevent fraud.
