Real World Examples of Occupational Fraud and What to Watch for

Posted on Jan 13, 2020

It may take two to tango, but it takes all three legs of the fraud triangle to commit occupational fraud, according to the research done by Donald Cressey in the 1950s. Cressey, a sociologist and criminologist, studied numerous occupational fraud cases during his career. He found that in nearly all of them, some element of each of the following were present:

  1. Perceived opportunity
  2. Rationalization
  3. Perceived unshareable financial need / pressure

Cressey’s fraud triangle helps explain how seemingly ethical people can commit egregious crimes, like embezzlement. Their actions cost American companies an estimated $50 billion annually, according to the U.S. Department of Commerce.

A recent article by my colleague Mike Nurse elaborates on the fraud triangle and lays out steps to prevent fraud in your workplace. In this article, I’ll show you real world examples of the fraud triangle elements found in recent fraud cases, so that you can more readily identify them in your own organization.

Perceived Opportunity

The first element, perceived opportunity, is typically easy to identify. Unfortunately, this occurs most often in hindsight. As an auditor, I frequently read articles about frauds committed by employees and wonder how nobody saw the cracks in internal controls that allowed the crime to happen. A respected, long-time employee may have too much trust placed in them, without the appropriate checks and balances in place.

In this story, a volunteer treasurer of a not-for-profit had access to the corporate credit card and bank account, with the full trust of the organization’s president. The treasurer allegedly forged the signature of another authorized signatory on the bank account. Apparently there was no review or oversight in place to catch her embezzlement. In September 2019, she pleaded guilty to fraudulently obtaining over $400,000 across a seven-year period.

Rationalization

Rationalization takes on innumerable forms. Occasionally, the individual’s rationalization for committing the crime can be pieced together through interviews with the fraudster.

The accused in this story said he worked seven days a week and never took vacation or holidays. In his mind, the money he allegedly stole was “extra pay” for the abundance of time worked. The problem is no one at the organization authorized him to pad his paycheck. He was fired, but never prosecuted, for allegedly stealing $108,000 over a year and a half.

Perceived Unshareable Financial Need/Pressure

Financial pressure or need isn’t always obvious, even if it’s present. Recent fraud cases have mentioned such financial stresses as an adult son with medical problems, a family member with legal issues, and a messy divorce. But remember, how you and I define “financial pressure” might not be the same as someone who is tempted to embezzle. Some cases mention the “financial need” to maintain lavish lifestyles, or purchase exotic vacations, expensive cars, and even plastic surgery. Fraudsters don’t tend to carefully invest their ill-gotten gains. Once they start spending money, they need more money to spend.

In this example, the director of a not-for-profit organization in Florida blamed a gambling addiction for the $50,000 she stole from her employer. Her lawyer described the addiction as “aberrant behavior,” noting she “led a stellar life and was a pillar of her community with a wonderful family.”

Takeaway

The way we do business has transformed dramatically since the 1950s, but underneath it all, our brains are still wired the same way. Understanding the fraud triangle will help you identify the red flags as they appear and take the necessary steps to prevent embezzlement and other occupational fraud at your organization. As always, strong internal controls are your surest bet against these sorts of crimes. Review your existing policies and triple-check for potential blind spots.

If you have any questions regarding fraud, contact a Clark Nuber professional.

© Clark Nuber PS and Focus on Fraud, 2020. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

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This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.

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