This article was originally published on Forbes.
“The fraudster’s greatest liability is the certainty that the fraud is too clever to be detected.” – Louis J. Freeh
Fifty-one percent of organizations have uncovered more fraud since the onset of the pandemic, according to the Association of Certified Fraud Examiners (ACFE). Part of this increase may be attributed to the work from home (WFH) model, which prevents organizations from having proper internal controls but could also be due to pay cuts brought about by the pandemic.
Accidental fraudsters, in particular, are a worrying concern. An “accidental fraudster” is a person who may otherwise be a good employee but turns toward fraud based on opportunity, financial pressure and rationalization. This person is usually in a position of trust in an organization and generally believes they can defraud their organization without being caught.
The Fraud Triangle
Donald Cressey, a sociologist and criminologist who studied the behavior of white-collar criminals, developed a model called the “fraud triangle,” which explains three factors that make someone more likely to commit organizational fraud: pressure, opportunity and rationalization.
Take the case of an ex-Amazon employee, who the company reported to the FBI in July 2020. As a selling support associate, his role was to support Amazon’s third-party sellers by creating and managing seller listings. Using his position, he allegedly issued false refunds worth $96,508.13 for products ordered on Amazon that were never returned. As a result, he has been charged with wire fraud and aggravated identity theft. While we can’t know his — or any fraudster’s — mindset for certain, we can see from the indictment that he recently went through a breakup, which may have contributed to the pressure to commit this fraud. In addition, he had the opportunity in the form of a “spoofer” account from Amazon to issue refunds manually.
The first leg of the triangle is pressure, such as financial difficulty, family troubles or the end of a relationship. As an investigator, perceived pressure is tricky business. You cannot allow moral values to cloud your judgment, as pressure is subjective for each person and depends on the fraudster’s personal issues.
Let’s look at an accounting administrator at Delaware River Waterfront Corporation (DRWC), who managed the accounts payable and receivable, bank reconciliations and general ledger work for 23 years. Last year, she was charged for theft of more than $2.6 million from DRWC. As reported in the indictment, her expenses show that she spent large sums of money on gambling, and a gambling addiction can create pressure that might push a person into fraudulent activity despite spending nearly half their life with an organization.
The next element is opportunity. Accidental fraudsters will most likely have a chance to take advantage of the system in a way that makes them believe they will not be caught. Opportunity often emanates from being in a position of trust.
A former bookkeeper and financial manager for a private law firm, for example, stole approximately $1,696,996 from the firm’s operating account. The bookkeeper had an enormous opportunity after being entrusted with issuing business credit cards to employees, maintaining the firm’s financial ledger, paying vendors and operating expenses.
The last leg of the triangle is rationalization. Accidental fraudsters may believe the fraud is a rational act due to their circumstances. They might feel that they deserve the money or, in some cases, may believe the company owes them for mistreating them.
Andrew Fastow, former CFO of Enron Corporation, said in an interview after exiting the prison, “I thought what I was doing was what I was supposed to be doing. I was excited and enthusiastic about these deals. We had parties when we closed deals, and we felt like rock stars.” He further explained, “I rationalized it by saying, ‘This is how the game is played,’ but it was really just a lack of character on my part.” In this case, the thrill of closing deals led him to rationalize his fraud, which is probably reminiscent of the famous depiction of fraud in The Wolf of Wall Street.
Beyond Fraud Triangle
Cressey developed the fraud triangle more than six decades ago. The model has stood the test of time and is a proven formula for investigation in the cases of accidental fraudsters. However, changing times have led others to update the model to include other elements.
The “Fraud Diamond,” for example, was created by David T. Wolfe and Dana R. Hermanson, who argue that in addition to the other three aspects of the fraud triangle, the fraudster must also have the “capability” or the required traits and abilities to commit fraud. Some other examples worth considering are the “Executive Fraud Triangle” (greed, pride and entitlement), Crowe Horwath’s “Fraud Pentagon” and Albrecht et al.’s “Fraud Scale.”
Every company should have anti-fraud practices in place to keep a check on its employees. In the case of Nguyen, Amazon was able to catch hold of the fraud because Amazon uses anti-fraud systems and processes to mitigate the misuse of its software and devices. Due to the pandemic and increased WFH, many companies’ internal systems might not be watertight. Beyond tightening internal procedures, companies should consider anti-fraud best practices, such as:
1. Investing in technology. Artificial intelligence (AI) and machine learning technology, including data analytics software like fraud detection tools and anti-money laundering software, can help detect irregular activity or transactions as well as the misuse of the company resources.
2. Knowing your employees. Get to know your employees and let them feel heard. Management should be approachable if any employee is going through a hard time.
In short, the best defense is a good offense. Being aware of the problem and developing strong anti-fraud practices can help organizations stay ahead in the game.