1. Fraud Theories Dr. Raymond S. Kulzick, CPA, CFE St. Thomas University Miami, Florida Copyright 2004 R. S. Kulzick

2. Fraud Theories Sutherland – White Collar Crime Sutherland – White Collar Crime Cressey – Fraud Triangle Cressey – Fraud Triangle Albrecht – Fraud Scale Albrecht – Fraud Scale Hollinger - Clark Study Hollinger - Clark Study

3. Edwin H. Sutherland 1939 First defined “white-collar crime” 1939 First defined “white-collar crime” –Criminal acts of corporations –Individuals in corporate capacity Theory of differential association Theory of differential association –Crime is learned –Not genetic –Learned from intimate personal groups

4. Cressey’s Offender Types 1. Independent businessmen 1. Independent businessmen –“Borrowing” –Funds really theirs 2. Long-term violators 2. Long-term violators –“Borrowing” –Protect family –Company cheating them –Company generally dishonest

5. Cressey’s Offender Types 3. Absconders 3. Absconders  Take the money and run  Usually unmarried, loners  Blame “outside influences” or “personal defects

6. The Fraud Triangle PRESSURE OPPORTUNITY RATIONALIZATION

7. Nonsharable Problems Violation of ascribed obligations Violation of ascribed obligations Personal failures Personal failures Business reversals Business reversals Physical isolation Physical isolation Status gaining Status gaining Employer-employee relations Employer-employee relations

8. Pressure Financial Financial Vice Vice Work-related Work-related Other Other

9. Opportunity Controls Controls –Environment –Accounting –Procedures Performance quality Performance quality Discipline perpetrators Discipline perpetrators Access to information Access to information Ignorance, apathy, incapacity Ignorance, apathy, incapacity Audit trail Audit trail

10. Rationalization They owe me They owe me Borrowing Borrowing Nobody will get hurt Nobody will get hurt I deserve more I deserve more It’s for a good purpose It’s for a good purpose

11. W. Steve Albrecht Nine motivators of fraud 1.Living beyond means 2.Overwhelming desire for personal gain 3.High personal debt 4.Close association with customers 5.Pay not commensurate with job

12. W. Steve Albrecht Nine motivators of fraud 6.Wheeler-dealer 7.Strong challenge to beat system 8.Excessive gambling 9.Family/peer pressure

13. The Fraud Scale Situational pressures Situational pressures –Immediate problems with environment –Usually debts/losses Perceived opportunities Perceived opportunities –Poor controls Personal integrity Personal integrity –Individual code of behavior

14. The Fraud Scale

15. Hollinger-Clark Study Hollinger-Clark study (1983) Hollinger-Clark study (1983) Surveyed 10,000 workers Surveyed 10,000 workers Theft caused by job dissatisfaction Theft caused by job dissatisfaction True costs vastly understated True costs vastly understated

16. Employee Deviance Two categories: Two categories: –Acts against property –Production violations (goldbricking) Strong relationship: theft and concern over financial situation Strong relationship: theft and concern over financial situation

17. Age and Theft Direct correlation Direct correlation Younger employees less committed Younger employees less committed But, higher position = bigger theft But, higher position = bigger theft Opportunity is only a secondary factor Opportunity is only a secondary factor

18. Job Satisfaction and Deviance Dissatisfied employees Dissatisfied employees –More likely to break rules –Regardless of age/position –Trying to right perceived inequities Wages in kind Wages in kind

19. Organizational Controls Some impact, but limited Some impact, but limited Hollinger studied five aspects: Hollinger studied five aspects: –Company policy –Selection of personnel –Inventory control –Security –Punishment

20. Hollinger’s Conclusions Employee perception of controls is important Employee perception of controls is important Increased security may hurt, not help Increased security may hurt, not help Employee-thieves exhibit other deviance Employee-thieves exhibit other deviance –Sloppy work, sick leave abuses, etc. Management should be sensitive to employees Management should be sensitive to employees Pay special attention to young employees Pay special attention to young employees

21. Hollinger’s Conclusions Four key aspects of policy development 1.Understand theft behavior 2.Spread positive info on company policies 3.Enforce sanctions 4.Publicize sanctions

22. Overall Conclusion 1 Perpetrators feel justified Perpetrators feel justified Must counter this Must counter this –Morally –Legally –Consequences

23. Overall Conclusion 2 Concept of wages-in-kind Concept of wages-in-kind –Hire the right people –Treat them well –Have reasonable expectations

24. Overall Conclusion 3 Controls must pose a visible and highly likely threat of apprehension Controls must pose a visible and highly likely threat of apprehension –Perception of detection is the greatest deterrent Hidden controls do not deter Hidden controls do not deter Controls cannot be predictable Controls cannot be predictable