The Development of Occupational Fraud in a Modern Organisation. Part I: Characteristics and Recent Developments of Occupational Fraud

By Marios M. Skandalis FCCA, MIFC, CFC, CFE  (*)

 “Rather fail with honor than succeed by fraud” – Sophocles

When considering these words of wisdom by this great Greek philosopher, one wonders whether indeed honor is practically one of the most important virtues of our lives today.  Unfortunately, as time passes and the competitiveness in the society that we live becomes more intense, virtues diminish and the need of having everything, by any means, is developing as the ultimate goal of our every day’s life.

Black’s Law Dictionary defines fraud as:

“All multifarious means, which human ingenuity can devise and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth.  It includes all surprise, trick, cunning, or dissembling, and any unfair way by which another is treated”.

Fraud rises in organisations and no matter how great the extent of the fraudulent activity is, the act can be damaging to the business.  There are no exciting chase scenes, no smoking guns and no bleeding victims, but fraud is a crime nonetheless. 

Occupational fraud is the use of one’s occupation for personal enrichment through the deliberate misuse or misappropriation of the employing organisation’s resources on assets.  The following four elements form the basic characteristics of occupational fraud:

  • ·         It leads to a violation of the employer’s trust by the employee
  • ·         It aims on direct or indirect financial gain
  • ·         It alters the organisation’s financial affairs
  • ·         People with no prior criminal history often commit it.

People are inherently dishonest, others to a larger and others to a lesser extent, as we all lie at some point in our lives for two basic and genetically programmed reasons which are to receive rewards or avoid punishment.  However, it would be completely wrong to imply that since all people lie then all people would end up being fraudsters.  Dr Donald Cressey identifies three basic personality trails of individuals that distinguish themselves as potential fraudsters:

1.      Motive

Employees commit fraud because they think they need the money.  This need is satisfied mostly via legitimate needs but not always.  High personal debts, living beyond means, inadequate income, excessive pride or ambition, non-recognition of performance, large gambling debts, need for power or control are just a few examples of the main “pressures” that most people face nowadays and could easily be a motive driving them to fraud.

2.      Opportunity

An opportunity is the condition or situation that allows a person to commit and conceal a dishonest act.  The opportunity to commit fraud within an organisation is also governed by a person’s position in that organisation.  The higher the position is of a person, the higher the likelihood for him/her to commit fraud.  Opportunities also often stem from lack of internal controls, or even the company’s failure to enforce its defined system of internal controls.

3.      Rationalisation

This is another way of saying that the result justifies the means.  But of course we know that this is not always the case.  So when the elements of need and opportunity come together, some people look for a justification to be dishonest and because they don’t want to call themselves thieves, they attempt to name themselves into the victims.

Based on the above, Albrecht et al established three “forces” driving to fraud, which are pressure, opportunity and integrity.  Based on the interaction of these three “forces” that drive fraud, the following matrix table can be established:













However if anyone were to study these theories, they all fall apart because if an employee wants to borrow money from the company he/she can do it via legitimate measures.  An executive’s job is to lead and not deceive.

Another characteristic of fraudsters is that they squander their illegal income rather than investing it or saving it and once they begin the fraud, it is very hard for them to stop as they begin to rely on the extra income.

Occupational fraud is broken down into three main categories:

·         Asset Misappropriation Schemes

These schemes include both the theft and the misuse of company assets.  Based on surveys that took place, this is by far the most common type of fraud scheme and the least costly per case.

·         Fraudulent Statements

Fraudulent statements primarily consist of falsifying financial statements by overstating revenues and assets, or understating liabilities or expenses.  Other fraudulent statements include falsifying credentials, or producing false work reports.  Based on latest surveys, these schemes are the most costly schemes per case.

·         Corruption

These schemes are those by which fraudsters wrongfully use their influence in a business dealing to procure some benefit.

The amount of fraud has been rising in most organisations over the last years and, more worrying, it is expected to continue to rise.  A significant factor behind this rise is the increasing involvement of technology, and in particular computers as an integrated element of the business process.  The widespread use of computerisation and inter-networking technologies and the methods by which information is handled within society, has enabled occupational fraud to spread dramatically.

Whilst the image promoted by the media of computer hackers as a major source of fraud may be unfounded, fraud is becoming increasingly technically orientated, with fraudsters turning technologies designed as business tools to dishonest ends.  As well as shifts in the tools and method of fraud, there are significant changes in the fraudsters themselves.  These changes are characterised by the following:

·         An increase in fraud committed by all levels of staff

The uncertainty for future as it holds today for the majority of staff, results in low morale and loyalty.

·         An increase in fraud involving collusion

With the increased complexity of operations in the business environment and the evolvement and encouragement by employers of the principle of teamwork, certain frauds as a result of teamwork, remain undetected for longer periods and with higher financial losses.

·         Increased involvement from organised crime

With the advancement of technology, the impact and magnitude of the effects of fraud as well as its complexity have increased considerably with fraud flourishing in almost all sectors of a corporation.  The reason that occupational fraud has become more visible is because corporations may incur liabilities for illegal acts.  This is because unlike individuals, corporations can be held legally responsible for the criminal acts of their employees if those acts are done in the course and scope of their employment and for the ostensible purpose of benefiting the corporation.  This is the case even if the management of the corporation had no knowledge or participation in the underlying criminal events or even if there were specific policies issued by the company, prohibiting the activity undertaken by the employees.

Another area that has undergone a dramatic change with respect to fraud is the area of corporate sentencing guidelines, which have become stricter and increased the severity of the punishments involved.

The role of fraud examiners is becoming more and more attractive to corporations as the cost of engaging a fraud examiner is completely insignificant to the potential cost (both monetary and non-monetary) in case of a fraud. 

As it can be seen from the above, the level of fraud and more particularly occupational fraud, has increased dramatically over the past few years and this in turn has increased the need of corporations to develop ways of preventing or even detecting fraud at an early stage in order to minimise the effect of its direct cost to the corporation and its potential liability cost.

Part II of the article which will be issued with the next edition, will be involved with the specific ways by which corporations can prevent and early detect fraudulent transactions.

(*) Marios M. Skandalis is a Fellow Chartered Certified Accountant (UK), a Certified Financial Consultant (US) and a Certified Fraud Examiner (US).  He has been a senior management consultant at Ernst & Young, the CFO of the General Insurance of Cyprus Ltd and currently heads the organization and methodology function of Bank of Cyprus Group’s overseas operations.  He is the Vice President of the Institute of Certified Public Accountants of Cyprus and a Board member of Transparency International (Cyprus).