Many organizations suffer from varying levels of employee discontent. Certain employees may feel, rightly or wrongly, that they are not being properly compensated for their contributions or otherwise treated incorrectly. Some of these employees, feeling their own financial pressures and given the opportunity, will take matters into their own hands.
This combination of financial pressure, opportunity and rationalization is commonly known as the “Fraud Triangle”. It was first described by Donald Cressey in his study Other People’s Money: A Study in the Social Psychology of Embezzlement. Mr. Cressy hypothesized in the early 1970s that otherwise trusted persons can become trust violators when this combination of factors exists. Today, one often can identify these elements in many employee embezzlement cases.
A recent example involves a bank officer who embezzled nearly $600,000. According to her plea deal on federal charges of bank embezzlement and filing false tax returns, this former vice president of loan operations at SmartBank employed a variety of tactics including:
- Using bank money to issue numerous cashier’s checks that were then deposited into her personal account at another bank or used to pay debts such as credit cards or auto loans. Much of this was used to improve her lifestyle.
- Manipulating the bank’s books to reduce the mortgage debt to the bank for both her and her parents
- Using her access and control over the bank’s general ledger to conceal her actions
- Lying to her accountant regarding the above to avoid detection and tax obligation
This employee identified a number of areas where internal control weaknesses would allow her to exploit the accounting system, which is the “opportunity” portion of the fraud triangle. The improper mortgage relief and lifestyle improvements establish the financial pressure portion of the fraud triangle. The third area, “rationalization”, was laid out in the plea deal:
“when interviewed by law enforcement…[she] believed that SmartBank was insufficiently compensating for all of her hard work for the bank and that she deserved more compensation from SmartBank….she decided to solve her dissatisfaction with her compensation from her employer by stealing and misapplying SmartBank’s funds, moneys and credits.”
The theft took place over a lengthy period from 2013 to 2018, effected and concealed though extensive fraudulent entries in the general ledgers.
Understanding the circumstances which set the stage for potential fraud is an important component in its prevention and detection. A robust system of internal controls, including proper segregation of duties, could also have prevented this theft or enabled it to have been discovered timely, which often avoids substantial losses. Segregation of duties involves separating the tasks of (i) asset handling, (ii) recording transactions and (iii) comparison or review of transactions or balances. Such separations prevent an individual from being in a position to both perpetrate and conceal a misappropriation of funds.
Fulcrum Inquiry performs internal control assessments and forensic accounting services.