No one can deny that fraud is increasing in organizations. Most recently, there have been multiple disclosures of fraud in the government's loan program that is designed to help small businesses navigate through the COVID-19 pandemic.
Individuals who are engaged in occupational fraud schemes often exhibit certain behavioral traits or warning signs associated with their illegal activities. Of particular note is living beyond one’s means (42%) and financial difficulties (26%). The question is how can the anti-fraud controls identify these behaviors? These behavioral red flags might show up through personal and workplace pressures. There may be warnings signs such as erratic behavior in the workplace. The results below come from a global survey of fraud conducted by the Association of Certified Fraud Examiners (ACFE).
Behavioral Red Flags Displayed by Perpetrators: 2020 ACFE Global Fraud Survey
|Behavioral Indicators of Fraud||Percentage Reported|
|Living Beyond Means||42%|
|Unusually Close Association with Vendor/Customer||19%|
|Control Issues, Unwillingness to Share Duties||15%|
|No Behavioral Red Flags||15%|
|Irritability, Suspiciousness, or Defensiveness||13%|
|Complained about Inadequate Pay||8%|
|Excessive Pressure From Within the Organization||7%|
|Refusal to Take Vacations||7%|
|Past Employment Related Problems||6%|
|Complained about Lack of Authority||5%|
|Excessive Family/Peer Pressure for Success||4%|
|Instability in Life Circumstances||4%|
The results of the survey about whether fraud exists clearly indicate that internal auditors should have their “eyes wide open” with respect to whether managers have internal and external pressures that might cause them to deviate from ethical norms.
There are a variety of ways to detect fraud such as management reviews and internal audits that account for 27% of detection methods. These internal controls are important but having a hotline to report fraud is by far the most important factor as indicated by 43% detection by tip.
Initial Detection of Occupational Frauds from the ACFE 2020 Global Study on Occupational Fraud and Abuse
|Detection Method||Percentage Reported||Median Loss|
|Notified by Law Enforcement||2%||$900,000|
Survey respondents provided information about how perpetrators were internally punished or dealt with. Not surprisingly, termination was the most common disciplinary action taken in occupational fraud cases (66%). In these cases, the organization may very well have cause to terminate employment.
Fraud occurs because in large part because senior officers turn a blind eye, perhaps because they themselves are involved in wrongdoing. In these instances, top officials have not set an ethical tone at the top, which is critical to develop an ethical organization culture.
One thing I've noticed in my years of teaching university students is the influence that behavior within organizations affects their perspective of ethics in the workplace. On the down side, it may lead them to believe they can get away with things that they otherwise would not. Some become cynical and ask if so and so can do unethical things and get away with it, why shouldn't I?
We need to do better in communicating with students why unethical behavior in organizations is dangerous and can negatively influence behaviors in their personal lives. Ethics is all about consistency. We shouldn't choose to act one way at work and another way at home.
Posted by Steven Mintz, aka Ethics Sage, on September 16, 2020. You can sign up for our newsletter and learn more about Dr. Mintz’s activities at: https://www.stevenmintzethics.com/. Follow him on Facebook and on Twitter .