Management Fraud:
A Dilemma of loday's Society
An Honors Thesis (HONRS 499)
by
Tara L. King
Ms. Linda VanScyoc
Ball State University
MuncIe,
Indiana
March 12,
1992
Graduation Date
May 2,
1992
_~
C.II
1he ~.I.~
/.l,
,~'1 C;
,
.2""/
I 't
q;~
.k~M,
The discussion of fraud is limited to management type
!rauds committed +or or against a company4
Rr·e perpetrated by those who are in
an
Management ·frauds
upper-level or
supervisory position and consist of willful misrepresentation
.J+ ·find.ncial in+orm2"\tion.
~pproaches
used by accountants to discover potential
fraudulent situationSD
~ichigan
The paper proceeds witt) suggested
A motivational study conducted by
GRAs is included in the discussion of fraud
::riminals.
Another study by two criminologists has been
included as a source of characteristics of possible fraud
~erpetrators
~roperty
and compares them to normal individuals and
offenders.
Another motivational study by Michigan
:PAs is presented in the discussion of fraud criminals.
:inally~
a list of di·ffersllt types of management fraud is
examined along with ways to prevent and detect their
Ethical values of many United States citizens have
greatly diminished since the beginning of
cur-Tent decade has been
la.bel ed the
society~
1II"Ie EleneF"l::\ti on"
The
because
people think of what is best for themselves when making
decisions.
One way to accomplish such selfishrless is through
the practice of fraud.
Individuals as well as businesses
Many
participate in fraudulent acts to benefit themselves.
reasons and ways are available to implement these deceptions
and illegal events which will be examined throughout this
The basic definition of fraud is the act of deceiving or
misrepresenting the truth in order to induce another party
1
into surrendering something of value or a legal right.
However, an absolute meaning of fraud cannot be determined
because of the constant changing environment.
In essence,
human nature establishes the possibility of fraud because of
man's standards of truth and justice.
As time passes, norms
change and certain concepts such as fraud must be altered to
allow for new conditions.
People possess the ability to
reason, but they also are capable of irrational behavior
leading to false ideas and actions.
1
W~~§t~r~§
§~Y~Qth
N~~
Massachusettes~
~gll~gi~t~
G. & r
Pl~tigQ~CY.
(Springfield,
Merriam Company, Publishers,
1'nl).
Jack Bologna.
~Q0
F'aqe
GQCpg[§t~
P~t~~tl9Q.
1 ..
Ec~~dl
(Boston:
Ib§
~§§i~§
pi Pc§Y§otiQO
Butterworth Publishers,
1984).
ea~ly
An
Biblical
example of deception
by God not
story:
to.
f~om
the
t~ee
although she has been
All the elements of
a perpetrator
misrepresented fact
(the serpent),
(that Eve will
f~aud
a~e
wa~ned
found in this
the victim
(Eve),
and the
become godlike if she eats
As shown by this example,
from the tree).
Heb~ew
back to the
Eve accepts the serpent's
story of Adam and Eve.
temptation to eat
~elates
deception has
existed 'for centuries but has not received much attention
until now.
3
F'raud is the most common human misbehavior in the world.
Eve~yone
can admit to being a
pa~ty
to a
f~audulent
whether as the victim or the perpetrator.
th~ough
accomplished
have taken
pa~t
o~
anothe~
whethe~
intentionally or
Lying and cheating are both intentional
ways of deceiving another,
mista~(es,
Deception can be
lying and cheating of which most people
one way
unintentionally.
fraud~
considered a
act
but all
untruths are not
Such untruths may occur because of
misinformation~
miscalculation,
or unintentional
ignorance.
All fraud cases are based upon the concepts of what is
fair and
just.
prudent man
The judge decides a case according to the
rule~
The rule regulres the Judge to imagine
what aM ordinary and reasonable man would have done In a
similar Situation as the defendant.
Previous cases heard on
3
Jack Bologna.
Q§~§S~!gQ.
Page 2.
~QCH9C~t§ E~~~~l
(Boston:
Ib§
~~§i£§ gf
EC§y§oti.QO
Butterworth Publishers,
1984).
the same type of fraud are also considered by the judge in
many common law
cases~
Althoug~1 all
types of fraud are important,
the focus of
this paper will be based upon corporate or management fraud.
This fraud can be defined as the willful misrepresentation of
facts by management or nonmanagement personnel of
4
business organizations.
Business frauds are intended to
financial
benefit the organization itself,
as in tax breaks,
employees, as in thefts and embezzlements.
or its
Corpor-ate frauds
can be internally generated by agents, officers or employees,
or externally generated by suppliers or customers.
The accounting profession has developed an approach
called "Red Fla9s" to discover potential management fraud
situl3.tions.
Fraud perpetrators are hard to profile, but the
Red Flags system presents types of situations that auditors
shoul d consi df2r.
organizational
its potent.L!l.
Red Flags are descriptions of human
dfld
behaviors that do not prove fraud but indicate
Thus~
a more extensive audit is required to
either rule out fraud or document its existence~
The Red Flags help monitor
employees,
personal
pressures of
prevent opportunities for fraud,
personality factors of employees.
and indicate
These three categories
form ~ continuum ranging from low to high~
A perscm falls
along the continuum according to the particular situation.
4
Jack Bologna.
~QCRQC§~§ Ec§~~~ Ibg ~~§i~§ gf EC§Y§otiQO
~Q~ P~~~£~l9Q.
Page 9.
(Boston: Butterworth Publishers,
1984).
among themselves.
Fraud is committed by all
levels of
6
employees and all
types of people.
Typically,
fraud
1S
Influenced by dishonest people who are motivated by greed.
rhese people should not be placed
in a position of
because they are driven by personal
trust
desires and selfishness.
Deciding whether a person has a strong desire for
gain is a difficult
personal
amount of
manner.
personal
wealth,
task~
All people want a certain
but most obtain
it
in an honest
The few who act dishonestly must be watched
closely~
In order to determine the integrity of a potential employee,
personality profile tests have been implemented to measure a
person's honesty.
profile,
but
fraud perpetrators fit
Not all
it provides a guideline far companies to adhere.
Another method to measure
15
~
employee's honesty
potential
a polygraph or a lie detector test.
The stress created
is reflected by changes in pulse rate or elevated
from lying
blood prmssure whIch can be seen during the test.
effectiveness of
past~
feel
into one
the test has been relatively high
The
in the
but people do not loo~( upon them favorably because they
it
is an invasion of
their
privacy~
Nevertheless,
a
detector test is a relIable way to evaluate an employee's
,I
integrity.
6
c.
E.
Reasons (ed.l.
gcimio~l.
Ib~ G~~m~ng!ggL§t
(Santa Monica,
Publishing Company,
Robert K.
Petrocelli
Book
G~~m~ §n~
Goodyear
19741. Page 166.
Willingham.
M§o~g§m~o1
(New York:
Incorporated, 1980).
Page 220.
Elliott and John J.
Ec~~~~ Q§i§~iiQQ
==
California:
~od
Q§i§CC§Q~§.
tb~
lie
,;
Edwin Sutherland and Donald Cressey are two
criminologists who have s}:amined the motivation of criminals
l3
and have provided insight on fraud perpetrators.
2;uther-land's
IIdj.+-ferE1 nt.iaJ
a.ss-:;oc::i.ation"
theol'''Y SL\ggest.s that
criminal behavior- is linked to a person's association with a
crinlinal
In other
environment~
wOf-ds~
individuals who
interact with people having criminal backgrounds tend to
become crimInals as a consequence of the interaction.
Sutherland also says that criminal behavior is learned among
Fraud will be committed if the rewards
outweigh the possibility of being caught and the punishment
that will follow.
l'his theory explains that a company that
creates a climate of honesty can reduce crime.
must follow a defined code of ethics and encourage employees
to obey the same codsa
Don.c::il d
Cressey·" s
II
nons hareabl e
motivation based upon financial
his position of financial
elements must exist:
need
gain.
II
th';?ory dea.I s
wi th
The person violates
trust by embezzlement.
Three
a nonshareable problem, an opportunity
for trust violation, and a set of rationalizations that
defines the behavior as appropriate.
Michael Comer.
bpcppc§t§
Book Company, 1977).
EC§Y~.
If the person is not
(New York,
McGraw-Hill
Page 9.
Albrecht, at 21.
~g~ tg R§t§~t 90.9. E:r..~y.~~!Jt:.
EC§Yct.
(Englewood Cliffs, New clt?rst?y:
Prentice-Hall Incorporated, 1982).
F'aqe .~~4.
Steve W.
~Y§lQ!§§
COflvinced tllat his actions are acceptable,
he will
flut
defraud ttle corporation because he cannot rationalize the
idea"
MOMM taxonomy is another classlfication system for
employee-related crimes.
l"he letters stand for Motivation,
Opportunities, Means, and Methods.
consists of economic,
ideological,
The motivational aspect
egocentric~
reasons for people to commit fraud.
Employees may steal from
the corporation because their economic survival
due to a financial
of spite or anger.
loss.
and psychotic
is threatened
others defraud a business because
Egocentric perpetrators are motivated by
jealousy or excessive pride.
These people want to prove they
are knowledgeable or clever.
The last category of psychotic
persons are induced to commit fraud because of misperceptions
or a distorted reality_
In order to be induced toward fraud,
theft must exist within the corporate
in internal,
an opportunity for
environment~
Weakness
management, accounting, and administrative
controls provides easy access to material that is subject to
fraudulent acts.
Inadequate reward systems and ethical
standards also need to be examined and redefined if a company
desires an honest staff.
The external environment can
threaten a firm and induce fraud.
High competition,
political action, and governmental regulations are examples
of outside behavior that can motivate businesses to resort to
theft.
The means aspect of the MOMM taxonomy consists of the
various ways to acconlplish the employee-related crimes.
Employees can overstate assets or revenues,
liabilites or expenses,
forge data,
understate
destroy records,
falsify per-formanes data.
Fraud cases are still
studied by
mOf-e
F.t.ud:i.to~-s
to add
or
being
"means" to the list.
The last part of MDMM is the methods used by
perpetrators~
personnel
Employees tend to compromise controls and
in order to defraud a
override or bypass internal
corporation~
and accounting controls to gain
access -to the information they wantw
bribery and conspiracy_
They tr-y to
They also r-esor-t to
With other-s involved, people
begin to believe their actions are not wrong and continue
until
the desired result is reached.
In addition to the theories of Sutherland and Cressey
and the MDMM taxonomy, data has been collected fr-om Cer-tified
Public Accountants on what they feel
reasons for employees to steal
are the most prominent
from their employer.
1-)
sur-vey
of one hundr-ed CPAs fr-om Michigan r-eveals that the number- one
reason people commit fraud is because they feel
10
away with it and not be caught.
Phi 11 i ps
F'E~tr-ol
eum Company
~
they can get
C. J. Silas, CEO of
agrees when he says
II:::::T!~
of all
taxpayers cheat because the odds of getting away with it are
10
Jack Bologna.
~Q~
~9CQ9C~tg
Q§t§~t~gQ.
Page 85 ..
EC~Y~i Ibg ~~§i~§ gf EC§Y§Qti9Q
(Boston: Butter-wor-th Publisher-s, 1984).
11
good.
People enjoy taking risks, but the possibIlity of
II
being caught must be minimal before the fraudulent act will
seem beneficial to the perpetratoru
The second most important reason employees defraud the
firm is
t.h~.t
they think, "Stealing a
12
company won't hurt
it~"
little from a big
Much time may pass before the act
is discovered, but once top management knows of the fraud the
perpetrator will be punished no matter what size the
Larger firms are more susceptible to fraud
because of the number of employees and the pressures placed
upon them.
Personnel controls and evaluations should be
iOlplemented in these companies in order to deter the
possibility of theft.
Many of the Michigan CPAs surveyed agree that most
employees who steal are caught by accident rather than by
a.udit~
Therefore, people are not scared of being caught.
Other reasons relating to the corporation include weak
internal controls, lenient punishments, and employee
frustrations with their job or employer.
Personal reasons also cause employees to defraud a
busi
nf:?SS.
These are not as common as other reasons such as
11
C . .J.
Silas.
j;:.b§ Q",y:.
Jack Bologna.
"'O~
IIA
G!uestion 01:
March 1989.
Page 86.
/I
Page 474.
~9Cg9C"'t§ EC"'Y~~
Q§t~£tigo.
1984).
Scruples~
Ib§
~.§i£§
gf
EC~y§oj;:igO
(Boston, Butterworth Publishers,
finances~
but they should be examined because the
consequences are just as ser-1DUS.
I
because they feel
Some employees steal
abused by their boss and seek revenge.
Others commit fraud because they are dissatisfied with some
aspect of their personal
They feel
life such as finances or even love.
that by stealing from the company they are
receiving compensation for the frustration they feel.
employees simply lack morals or ethics which
Elome
leads them to
theft.
c.
Nettle,- once stated,
"Ther·e is, theil, no olle ,road to
the violation of a vocational financial trust; there are
1 :.:;
many.
Nettier's quote emphasizes the numerous reasons for
II
the existence of fraud.
Empirical
research on fraud
perpetrators is on-going because substantial
available.
authors of
evidence is not
The lack of empirical studies influenced the
~g~
tg
p~t~st
~Qd
EC~Y~Qt
~YsiQ~ss
EC~Yd
to
14
conduct their own research on fraud perpetrators.
The study focuses on a sample of prisoners convicted of
fraud and compares them to two other groups.
Dne of tile
groups consists of prisoners incarcerated for property
o·f·f en ses.
G.
The other comparison group comprises college
Nettler.
;rQYC~l~!.
"Embezzlement Without Problems."
~citi§b
i;:r:jJ]g~lQ!Q9Y.
Vol ume 14.
Number 1.
1 'n 4"
gf
F'age !S?6.
Steve
W~
Albrecht,
et ala
BUSlQ§§§ Eraud.
Prentice-Hall
Hg~
tQ
Q§t§~t
~!J.Q
f:::r..~§X§D.t.
(Englewood Cliffs, New Jer·sey:
Incorporated, 19821.
Paqe 2'?6.
students.
The purpose of the research is to discover whether
perpetrators, as a group, are different from the normal
popUlation and other criminals.
For the study, perpetrators
are defined as those who are in a managerial or professional
position and who illegally apportion thousands of dollars
15
their employers .
Twenty-three prisoners from the Utah
.ate Prison serve as the subjects for the research.
fraud perpetrators are not typical perpetrators
lecause people who commit
rested.
Therefore,
fraud usually are not caught and
incarcerated fraud perpetrators are
ase with the most serious crimes and most extensive
riminal
records.
Fraud perpetrators are compared with property offenders
demographics, criminal background, and personailty
I
~ariable5 to determine differences between the two groups.
~he
study reveals that fraud perpetrators are considerably
bider.
16
The older age is understandable because it
benerally takes a
long time to obtain a managerial position
~r a position of trust.
Women tend to become fraud
terpetrators more than males.
Since women have greater
fpportunitles to obtain jobs that allow them to
~----------
1~w
I Steve W. Albrecht, et al.
~Y~lQ~.~ EC§Y~.
Prentice-Hall
HQ~ tQ Q~t~£t ~Q0 EC~~~Qt
(Englewood Cliffs, New Jersey:
Incorporated, 1982).
Page 226.
~6
I
, Steve W. Albrecht, et al.
HQ~ tQ Q~t~~t
~Q0 EC~~~Qt
~Y~iQ~~. EC~Y~.
(Englewood Cliffs, New Jersey:
Prentice-Hall Incorporated, 1982).
Page 227.
steal~
they will become evel1 more lnvolved ir, fr-aud.
lhe
older age of fraud perpetrators helps explains wtlY Alore of
them are married, have children, and live a more stable
Social differences are also found by this study.
pet.rat.Drs are more likely t.o have a higher educat.ion t.han
:her" cr"iminals"
They are less likey to use alcohol or drugs
nly because of t.he older age of perpet.rat.ors and t.heir
of drug use.
Fraud criminals are shown to
·va a shorter arrest record, except for those who are
"ncarcerated because of the severity of the crime committed.
IP,-rm,m"'t.y offenders ar-e ,found t.D begin t.heir crimInal beha,viDr
at a younger age and are more likely to be sent to juvenile
17
correction +acilities.
Fraud perpetrators and property offenders also possess
105v'c:hological differences with I'"(;?spect to per-sonality tr-ait.sm
Ie involved in fralld seem to have more opt.imism, selfself-su'fficiency, achievement. motivation, and family
Propert.y offenders show more depression, selfradat.ion, dependence, lack of mot.ivat.ion, and family
18
Self-cont.rol and social conformit.y as opposed t.o
7
Albrecht., et. al.
~g~ tg Q~t~~t ~D~ f[~Y~Dt
(Englewood Cliffs, New Jersey,
Prent.ice-Hall Incorporat.ed, 1982'.
Page 232.
St.eve W.
~Y§iO~§§ E[~Y~.
fj
Albrecht., et. al.
Hg~ tg Q~t~~t ~D~ f[~Y~Qt
(EnglewoDd Cliffs, New Jersey,
F't-'ent.i c:e-Hall IncDrporat.ed, 19£12).
Page ;;;:::::cL
St.eve W.
~Y§iO~§§ E[~Y~.
social
isolation and hostility are expressed by fraud
perpetrators.
All these differences suggest that Fraud
perpetrators are similar to normal
people with healthy
personalities and socially acceptable characteristics.
A
study by Glick and Newsom support this by indicatIng that
embezzlers appear like normal
likeable, and socialable.
persons who are sincere,
19
Next, fraud perpetrators are compared to a group of
college students.
This part of the study shows that fraud
perpetrators are more similar to college students than
property offenders.
Only six out of 15 traits were
discovered as significant differences, thus supporting the
Idea that fraud perpetrators are guite normal.
criminals are more dishonest,
more independent,
White-collar
have more psychic pain, and are
sexually mature,
socially deViant,
empathetic when compared to college students.
and
20
Despite
these six differences, fraud perpetrators are considered very
similar to normal college adults but guite different from
other criminals~
Comparing fraud perpetrators to other crimInals helps
auditors predict what types of people may commit white-collar
crimeSa
Not one single explanation can cover all
kinds of
,
o
Steve W. Albrecht, et al.
Ho~ to Q~t~~t
@Qd E~§Y§Dt
§Y§iQ~§§ EC~Y~.
(Englewood Cliffs, New Jersey:
Prentice-Hall Incorporated, 1982'.
Page 166
Steve W. Albrecht, et al.
Ho~ to Q~t~~t
~Q~ EC~Y~Qt
§Y§iQ~§§ EC~Y~·
(Englewood Cliffs, New Jersey:
Prentice-Hall Incorporated, 1982).
Page 168.
fraud,
but at least professionals have a place to begirl their
Studies on the motivatIon of
research and investigationsu
perpetrators are not the only ones conducted with respect to
fraudu
Auditors have also developed different forms of fraud
initiating trom both internal
and external
sources.
Within the internal and external types of fraud are four
divisions:
extorsive.
larcenous,
misrepresentative,
manipUlative,
and
Larcenous frauds provide no concealment because
the victim company's records will not disclose the theft,
the records are insufficient to identify the perpetrator, the
victim condones the fraud,
or the thief does not have access
21
to any concealment course of action.
personal,
commercial,
Falsification of a
or physical reality before, during, or
after the theft either to assist its commission or conceal
105s refers to misrepresentative
frauds~
Manipulation refers
to the falsification of accounting records before,
after a larcenous or a misrepresentative theft.
fraud
is also intended to conceal
its commission.
a
during,
O~
This type of
the illegality or assist in
Finally, the extorsive division consists of
frauds that use force, blackmail, or coercion.
Internally generated frauds are committed by a
corporartion's own officers,
agents,
directors,
or employees.
These people have access to and control of accounting record,
21
Michael Comer.
~g~~g~~t~
Book Company, 1977'.
E~~y~.
(New York:
Page 19.
McGraw-Hill
iut have limited access to physical assets.
~rauds
~oth
originate internally:
contain all
Two t yp."s of
management and operational.
four divisions discussed earlier which are
fe,-y simi 1 a .... in each type.
For example,
the one difference
let ween inte .... nal la .... cenous management and inte .... nal
la .... cenous
!pe .... ational f .... auds is the type of assets at .... isk.
I
fanagement frauds involve conflicts of
interest~
misuse and
Iheft of office supplies and equipment, misuse of compute ....
lata~
and misuse of secretarial services.
I
~tOCkS
are categorized as operational
~perational
Stealing tools or
thefts.
fraud includes the use of machines,
Anothe,equipment,
or
ime to perform private or conflicting work.
Misrepresentative management and operations frauds also
,ave only one significant
~re
difference~
restricted to a physical
Ihie·f is a pa .... ty.
Management type thefts
or commercial
event to which the
An example involves a company that loaned
~ambling machines to cafes and clubs whose sales manager
!
~ampered
with the cash meters on the machinesu
The fraud
is
I
~f
i
a physical reality and the thief is a party to the event
ecause he was responsible for reading the cash meters and
acording the profits.
~5uallY
i
~hief
However,
misrepresentative operations
are restricted to a physical
has contr-ol.
reality over whiet, the
These f .... auds include falsifying accident
f-.. .·_·_·_-_·_. _. . . ·
r2
Mi. chael Come,-.
~~9t:PQCet§!
Book Company, 1977).
f~r:e~'Q.
(New Yod,::
Page 26.
McGraw-Hill
claims for insurance or compensation, altering time clock
cards,
and misrepresenting inventory levels.
The most prevalent and costly corporate frauds are the
manipulative management thefts committed
internally.
frauds consist of embezzlements, computer crimes,
purchases,
and false performance reports.
23
These
false
Since the thief
is
in a management position, he has much access to accounting
records which conflicts with the opertaional frauds.
The
latter type of frauds are performed by operations employees
who only have access to SOurce documents which are limited in
information~
Examples of manipulative operations theft
include payroll padding, false cash purchases, and false
expense claims.
The second source of frauds are externally generated and
consists of business contacts, opportunities, and organized
thefts.
External frauds are committed by suppliers~
vendors,
or customers who have limited access to business premises,
assets?
and accounts.
The first type of external theft is
larcenous bUSiness contacts which are similar to internally
generated larceny.
The only difference is the source of
risk which is outside the firm.
The conversion of stolen
gOOds into cash is a perfect example of an externally
generated larceny as the goods are returned to the same
company from which they were taken.
----------·3
Michael Comer.
~9CP9C§t§ EC§Y~.
(New York: Mcgraw-Hill
Book Company, 1977).
Page 30.
Larcenous opportunist thefts differ from the other
la~cenie5
thefts.
because they consist mainly of petty or high impact
The opportunity to steal
by the thief
the assets must be created
through trespassing or altering his business
24
status.
Robbery, burglary, hold-ups and factory thefts
a~e
catego~y.
classified as part of this
The last larcenous fraud is of an organized type that
is preplanned and
The thief often
di~ected
~elies
collusive
~elationship
company.
Industrial
toward hIgh-valued consumer goods.
upon inside information
f~om
a
with an employee of the victIm
espionage is an excellent example of an
externally organized theft.
The next category of
misrepresentative~
exte~nally
gene~ated
Business contacts are frequently
established with the main objective as fraud.
misrepresents an event over which he has
he is a party.
Examples include
insurance frauds,
c~edit
The thief
cont~ol
card
or to which
f~auds,
con games, and investment frauds.
external opportunists
~eality
thefts are
gene~ally
that is directed
from such an action is a
towa~d
misrep~esent
The
a commercial
a third party.
Resulting
loss of an intangible asset like
market share by the victim company.
Finally, an organized
misrepresentation can also be employed by a perpetrator.
24
Michael Comer.
~9CQ9C§t§ Fraud.
(New York, McGraw-Hill
Book Company, 1977).
Page 44.
These frauds involve a physical reality and result in a loss
of a tangible asset by the victim company.
and forgery fall
into this final
Counterfeiting
type of misrepresentative
fraud.
Next are the externally manipulative frauds.
Business
contacts can also be used to manipUlate information found in
documents that exist because of the business relationship
between the victim and the perpetrator.
False investment
data and false credit applications are classified as
manipulative frauds.
The opportunist manipUlates accounting
records that are outside the ownership or control of the
victim company.
The thief has access to the information and
can create a false record or destroy an existing one.
Organized manipulation usually involves an employee of the
victim company who has internal
access to records.
These
employees are generally driven by greed and become a party to
the conspiracy.
External
extorsive thefts are similar to those that are
internally generated.
blackmail,
firm.
They are produced through force,
or coercion but the sources are found outside the
fhe threat may be directed toward the owners of
the corporation or the employees depending on whether the
loss is hidden among records or is obvious on the financial
documents.
As can be seen, several categories of fraud have been
formulated by auditors and other professionals.
Understanding the different characteristics of each type
~ases fraud detection and prevention~
~5
committed,
the perpetrator will
No matter which theft
try to utilize the best
I
~oncealment
i
"aught.
course possible to limit the chance of being
From all
the classes of frauds,
extorsive and
~anipulative are the most dangerous and difficult to detect.
prevention techniques have been developed to help deter these
I
~wo
Ii
types of fraud as well as the many others.
The prevention methods incorporate the "Red Flags" that
~ave
previously been described.
~onsist
of situational
~ersonality traits.
~liminate
all
pressure,
As a
review~
Red Flags
opportunities, and
A corporation does not desire to
pressures because individuals work well
under-
a
I
~oderate
level of stress.
However,
an overwhelming amount of
i
pressure can lead an employee to commit fraud.
Avoiding unrealistic performance expectations is one way
i
~o
reduce situational pressures.
Companies with a lido it. at
25
attitude encourage employees to behave dishonestly.
I
~nvolving
people in setting performance goals is an excellent
~ethod for establishing realistic expectations.
,
~ounSeling should be available to employees.
~ICOhOI, drug, and financial problems tend to
~ecause
of the intense pressures.
I
~ituational
Personal
People with
commit fraud
A last way to reduce
pressures is to implement fair and uniform
~."--...."-.. - ...... -- ..."-..
~.,,:
~.d
I Steve W. Albrecht, et al.
~Q~ tQ Q§t§£t §Q~ EC§~§Qt
:
~Y§!Q§§§ EC§Y~.
(Englewood CLiffs, New Jersey:
F'rentice-'Hall Incorporated, 1982).
Page 182.
personnel policies.
Resentment of superiors can be created
through policies that reflect unfair treatment of employees;
thus they seek revenge on the corporation.
Decreasing the opportunity for fraud requires tight
t Icon':ro.s.
t
J
~,jj .in~t~rna
Corporations must monitor bUSiness
transactions and interpersonal
purchasing agents,
relationships of Suppliers,
bUyers, and sales representatives to
insure honesty and subjectivity.
Accurate accounting records
must be maintained to produce effective reports.
Separation
and rotation of duties should also be implemented.
Individuals with total control over an operation are capable
of fraUdulent acts because no one is available to monitor
their performance.
Separating duties allow corporations to
discover illegalities easier.
Group work is also an
effective way to reduce opportunity to commit fraud because
people enjoy being able to identify with a team.
Regardless of the situational pressures and the
opportunities to commit fraud, the dIshonest act is still
~~6
performed by the individual.
SOCiety holds individuals
responsible for
thus encouraging them to
their behavior,
adopt a strong ethical
through lectures,
casual
~Dmments,
_
code~
Managers should teach honesty
group diSCUSSions,
and moral
behaviors~
written materials,
Honest and dishonest
-- - ._- ._- -.- -- ..- --26
Steve W. Albrecht, et al.
HQ~ tQ Q§t§~t
@!JQ E:r.~y§f].t;.
~Y§~Q§§§ EC@Y~.
(Englewood Cliffs, New Jersey:
Prentice-Hall Incorporated, 1982'.
Page 1136.
behavio~
mL!st be defined by top management.
HI'1
e;.~pl
ici t
codl:::':
of conduct should also be adopted and followed by all
personnel.
Keeping f~aud and its consequences a sec~et from
employees can influence perpetrators to continue their
dishonest actions.
If white-collar criminals are never
prosecuted, employees perceive the act as not very severe.
Penalties for fraudulent activities should be harsh in order
for personnel to understand the intensity of the crime.
Severe punishments will
as a
not eliminate fraud,
but it does act
deterrE~nt.
Prevention techniques do not always work for every type
of fraud, but they provide a startinq point for auditors.
Comparing previous fraud cases to current ones adds insight
into what should be done to remedy the situation.
against crime,
a corporation should constantly review
policies and controls.
Employees need to know what is
expected of them and the consequences that follow if rules
~::\re
d i sobey-ed.
Implementinq the above procedures will help
eliminate some of the thefts and create a more honest working
environment..
I
I
I
I
I
1
1
webster'§
§~Y~ntb N~~ ~Qii§g~~t§ P~~tiQn~cy·
----··--·~~ssachusettes~
i,
Ga
& C. Merriam Company,
(~;pringfield~
F'ub 1 i sher-s
1(174).
F"aqe
Bologn2a
~9CR9~~t§ Ec~~~.t Ib§ ~~§i~§ gf EC§~§DtiQD
(Boston: Butterworth Publishers,
F"age 1.
~
,:"~~;2.
I
FJack
~Dd P§t§~tiQD.
1(84).
13
,Jack
~QCRQC~t§ E[§~~~
Bologna.
@Q~ Q§t~~1~QQ.
1'1'84).
(Boston:
Ib§
~~§i~§
gf
Ec§~~otiQO
Butterworth Publishers,
Page 2.
~QCgQC~t@ Ec~~dt
Bologna.
@Q~ P§t~~tiQn.
1(84).
Ib§
~~~i£§
gf
EC~Y§DtiQO
(Boston: Butterworth Publishers,
Page 9.
M~n~g§m§nt
Elliott and John J. Willingham.
@n~
P§t~~~§n~§.
(New
York:
F.::r..~~.~£L:_ P§t.§~.t~. QU.
Page 213.
Peb--ocell i. Books Incorporated, 1(80).
Robert K.
6
c.
E.
Reasons
tb§
(ed.).
~cimiQ~l.
==
Ib§ ~cimioglggi§t
Ib§ ~cim§ ~od
(Santa Monicd
California: Goodyear
Publishing Company, 1974'.
q
Page 166.
-,
I
Elliott arid John J. Willingham.
M§Q~g§m§Qt
Ec~~~~ R~te~~iQQ ~Od Q§t§CC§Q~~·
(New York:
Petrocell i Book IncOl'-por"ted, 1(80).
Page 220.
Robert K.
8
Michael Comer.
~QCQg~~t§ EC@Y~.
(New York: McGraw-Hill
Book Company, 1977'.
Page 9.
9
Albrecht, et al.
Hg~ tg P§t§~t ~Q~ EC~Y~Qt
(Englewood Cli.ffs, New Jersey,
F'r'ent.ice-'Hall Incor'porated, 1982'.
Page :3A.
Steve W.
~Y§iQ§§§ EC~Y~.
10
Jack Bologna.
~9Cgg~~t~ E~~Y~L Ib~ ~@§i~§ gf EC~Y§QtigQ
(Boston: Butterwort.h Publishers,
F'a'Je 85.
@Q~ P~t~~tigQ.
1984)"
1
c.
J.
Silas. IFA Question o·f Scruples.
Page 474.
l"larch 1989.
!:.b§ Q.;ly..
II
, .... \
,..;;.
gQCHgC~i€
Jack Bologna.
.;lOg
u
Ni-:?t tIer'
~§§i£§ gf EC~y§otiQD
Paqe 136.
1984).
G
Ib§
EC~~d!
(Boston: Butterworth Publishers,
D§t§~tiQo.
II
u
~gyco~l
Emb ez z 1 ement Wi t
gf Gcimio9iggy.
hOLl t
F'r ab 1 ems
Volume
14.
u
IF
:t:ti§t}
~!':.~..
Number
1.
Page
576.
14
Steve W. Albrecht, et al.
~U§iD@§§
r='rent i
EC~Y~.
CE~"~'Hall
(Englewood Cliffs, New Jersey:
Incor'por""ated,
Steve W. Albrecht, et al.
~Q~
tQ
198~::).
D§t§~t
PagE;!
:~26"
.;lOg Ec§vent
Bus~.O§§§
fraud.
(Englewood Cliffs, New Jersey~
Prentice-Hall Inccn'·por-at.ed, 1.982).
F'agE~ :;::2t:>.
Steve W. Albrecht, et al.
~Q~ tQ D§t§~t .;lOg Ec§x§ot
~y§iO§§§ EC.;lyg.
(Englewood Cliffs, New Jersey:
Prenti ce-Hall Incor-porated, 1982).
Page 227.
'7
Steve W. Albrecht, et al.
~Q~ tQ Q§t§~t ~!J.g E~~.~Y.§Dt
~y§iO§§§ EC.;lyg.
(Englewood Cliffs, New Jersey:
Prentice-Hall Incorporated, 1982).
Page 232.
18
Steve W. Albrecht, et al.
~Q~ to Q§t§~t .;lOg EC§Y§ot
~Y§iO§§§ EC.;lyg.
(Englewood Cliffs, New Jersey:
Prentic:e--Hall Incorporated, 19[32).
Page [S::::'
19
, Steve W. Albrecht, et al.
~Q~ tQ Q~t§~t §)[]9 t:r. §y§o.t.
~y§~O§§§ EC~yg.
(Englewood Cliffs, New Jersey:
Page 166.
FYentic:e"-Hall lncorporat",d, 1982).
eo
Steve W. Albrecht, et al.
~Y§in§§§
~Q~
tQ
D§t§~t
.;l09. E:r§x§ot
(Englewood Cliffs, New J' er sey:
IncorpOt-ated, 1982).
Page 168.
Ec§~~.
Prentice--Hall
!1
!
Michael Comer.
~QCeQC.;lt§ EC.;lyg.
(New York: McGraw-Hill
Book company. 1977).
Paqe 19.
I,i",'" t"li chael
LL
Cornel'".
!;;9C,P9C@,:I;.@
Book Company, 1977).
(New YOl'"k: McGl'"aw-Hill
Page 26.
Michael Cornel'".
~g~pg~@,:1;.@ EC@,Y~.
(New YOl'"k:
Book Company, 1977).
Page 30.
~
24
Michael Cornel'".
!;;9Cpg~@,:1;.@
Book Company, 1977).
Steve W.
EC@,~lg,.
(Ne", YOl'"k: 1'1cGr'aw'-Hi II
Page 44.
~g~:I;.g R~:I;.@~:I;. @,Q9 EC@Y@Q:I;.
(Englewood Cliffs, New Jersey~
Albl'"echt, et al.
~y§iQ~§§ Ec§~~.
Pl'"enti ce--Hall
26
McGl'"aw-Hill
Incol'"pol'"ated,
1982).
Page 182.
Steve W. Albl'"echt, et al.
~g~:I;.g R@:I;.~~:I;. @,Q9 E~.Y.Q:I;.
~Y§iQ.§§ E~@,y9.
(Englewood Cliffs, New Jel'"sey:
Pl'"entice-Hall Incol'"pol'"ated, 1982).
Page 186.
i
~lbrecht, W. Steve, Keith R. Howe, and Marshall B. Romney.
Ib§
\
~§t§C[iOg E[~~rtL
I
Altamonte Springs,
Auditors, 1984.
~
J,Dt§[O~l e~ditg[:§ E§[§g§~tiY§·
Florida:
The Institute of
Internal
~lbrecht~ w. Steve~
Marshall B. Romney, David J. Cherrington,
and Allan J. Roe.
HQ~ tg Q§t§~t ~D~
EC§Y§Dt §~§io§§§ Ec§~~.
Englewood Cliffs, New Jersey:
Prentice--Hall Incorporated, 1982.
I
L.
Reed Payne,
ologna~
~QCRQC~t§ Ec~~~r
Jack.
Q§t~~ti.Qo.
Boston~
Ib§
~§§~.~§
gf EC§Y§OiiRO
Butterworth PLlblishers,
omer~
Michael.
gQ[P9C§t§
Book Company, 1977.
Ec§~~.
New York:
Mcbr-aaw-Hill
M~Q~g~W~Qt
flliott, Robert K.
I
and John J. Willingham.
P~t~CC~QS~. New York: Petrocelli
Book Incorporated, 1980.
EC~Y~!
~1€~ttJ.er,
Ii
P~t§stigQ ~Q~
b.
:J.~!'=.'t:. C!~J
IIEmbezzlement Without
gf (:;C.tW!o.Q.QI..ggy'.
C;;~;p;;;~;;-;
I
hIas, C.
i
p~y..
~§~§1§C~§
I
Pr·oblem~;.
Vol ume 14.
II
~L·.iti§b.
Number 1.
1974.
Pages 570-·-5T7.
reasons, C. E.
,
Criminal.
I
~O~
1984.
(:;~twtQ9199t2t
Santa Monica,
California:
==Goodyear
(:;ctw§ ~Q~ tb~
Publishing
1974.
,L
"A Question of Scruples." I,!j,.:t~1 QP~~~St!§2 9+ ttl~
March 1989.
Pages 473-476.
§§Y§ntb
~§~ ~Qll§gi~t§ Qi_£tiQn~c~u
Massachusettes:
1971.
Ib§
(ed.).
G.
Springfield,
& C. Merriam Company, Publishers~