On Corporate Fraud

Corporate fraud has always been one of the scourges of civilized society, although in the past decade we have witnessed unprecedented levels of greed in corporate culture. The past decade has been marred by Enron, WorldCom, Adelphia and many others, as fraud shrinks our economy by approximately six percent. Watchful eyes cannot be everywhere at all times, but often the problem is that the individuals responsible for oversight lapse on their duty of independence. In response, wide scale reform has been passed into law as the government tries to combat the problem on all fronts. However, even the most stringent reforms, reporting requirements, and penalties do not deter all fraudulent behavior within the corporate environment. I want this series of articles to serve as reference point for a variety of individuals, since fraud is a serious concern whose aftershocks can be felt well outside of the company. Thoroughly understanding and utilizing the methods contained in this book will help combat the challenges we now face today in the work place.

Fraud can be defined with the concept of the rogue employee. This person is any employee of the corporation who goes beyond the duties they were hired for conspires and executes attacks. These systematic attacks weaken the corporation both financially and reputationally, as well as drain the other resources normally dedicated toward success. The rogue employee has no integrity or regard for the corporation and its shareholders. Their only motivation is to lie and defraud. Often times the rogue employee’s actions are carried out under leadership that was either under informed, willfully blind, or worse complicit in the fraud itself. Although this is not the only type of fraud, it is the one that most people tend to think about.

Before tackling the internal controls needed to prevent fraud in the workplace, I wanted to tackle the underlying motivations for what makes a person commit this type of behavior. To help explain the underpinnings of the problem, I want to cite the work of Dr. Donald Cressey, one of the pioneers of modern fraud study developed a hypothesis, which he coined “The Fraud Triangle.” The Fraud Triangle has three interrelated elements, which create the necessary combination for a person to commit a fraud. The triangle consists of motive, opportunity, and rationalization. Motive is the reason or set of circumstances that is the reason people commit improper behavior. Greed is most often the central determining factor, but other’s include living beyond one’s means, an immediate financial need, debts, poor credit, a drug or gambling addiction, family pressure and others. After motive, opportunity is the environment they work in that enables them to actually perform the fraud.

Poor internal controls and lack of oversight are key contributors and give the fraudster the chance to execute his scheme. A fraud is only able to be committed with the proper access and the opportunity presented at the time the fraud is committed. The final element of the triangle is rationalization, which is defined as how the individual justifies and accepts what he/she has done. What is astonishing about the rationalization aspect of the fraud triangle, as the authors shrewdly point out, is that most individuals do not feel that they have done anything wrong. Ironically, most people who commit fraud view themselves as honest. Combined, these three factors create a nexus of circumstances and beliefs that allow fraudulent crimes to be committed.