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Honest Talk About Fraud

It’s not only “bad” or greedy people acting alone who are guilty of wrongdoing, and internal controls go only so far

The Essentials

There are a number of convenient myths about fraud committed in organizations that we like to believe. Fraud is committed by bad people acting alone out of greed or need. The culture within my organization wouldn’t allow for fraud to happen. The only way to prevent fraud is to improve internal controls. In this QSB Insight TALKS presentation filmed at Queen’s Grant Hall, Pamela Murphy (retired) lays these myths to rest. Murphy is associate professor and E. Marie Shantz Fellow in Accounting at Queen’s School of Business.

Video Highlights

1:22     According to the fraud triangle model, fraud happens in the presence of: motive; perceived opportunity to perpetrate fraud and get away with it; and ease of rationalization.

2:22     Myth: “Fraud won’t happen in my organization.” Reality: Forty-five percent of employees recently surveyed said they witness wrongdoings at work. Thirty-seven percent of senior executives from around the world, surveyed by PricewaterhouseCoopers, reported that their organizations were victims of fraud. According to the Association of Certified Fraud Examiners, fraud costs organizations roughly five percent of annual revenues. “Fraud happens more than we like to believe,” says Murphy.

3:42     Myth: “Fraud is committed because of greed or need.” Reality: Not quite true. Murphy and colleagues have identified three reasons for fraud being committed in organizations: financial incentive, social pressure, and malevolent work environment. A socially-inspired motive “happens a lot more than we give it credit for.” An example is Société Générale rogue trader Jérôme Kerviel, who wanted to be known as a star performer but ended up being convicted of breach of trust, forgery, and unauthorized use of the bank’s computers. 

7:34     Myth: “Fraud is committed by bad people.” Reality: Some may be predisposed to commit fraud — psychopaths, Machiavellians, narcissists. “But there aren’t enough people on the planet to match the fraud statistics that are out there.” In the case of fraud, Murphy says, “we are all able to rationalize our behaviour.” We shift the blame, plead ignorance, insist we’re entitled, or find a moral justification. Murphy figures 10 percent of us are predisposed to commit fraud, 80 percent will take advantage if the conditions are right, and 10 percent are saints.

12:54     Myth: “Fraud is committed by someone working alone.” Reality: When Murphy interviewed people in prison who were convicted of fraud, 60 percent of them said their fraudulent activity directly involved more than one person.

15:42     Myth: “The culture or climate within my organization could not be associated with fraud.” Reality: Almost 40 percent of the people Murphy and colleagues interviewed who perpetrated, witnessed, or investigated fraud described an “instrumental climate” within the organization. An instrumental climate is one in which self interest or the organization’s interest trumps ethical or other considerations. An instrumental climate can be found in a sub-unit or division of an organization as well.

17:30     Myth: “The only way to prevent fraud is to improve internal controls.” Reality: Internal controls clearly prevent fraud but controls can be ignored or overridden, either by a fraudster acting alone or in collusion. You can also never underestimate the power of motivation or rationalization, two of the factors in the fraud triangle. Organizations should “try to deal with the entire fraud triangle when thinking about instituting preventive measures,” Murphy says. Fraud training should do a better job of exploring motives and rationalizations from an employee’s perspective. To cut down on collusion, organizations can introduce mandatory vacations and job rotation. And to prevent an instrumental climate from taking root, employees should be regularly surveyed about workplace attitudes.