• Fear of punishment
• Desire for rewards
• To act in a just and moral manner according to society’s standards

• Occupational Fraud and Abuse
• White Collar Crime
• Organizational Crime
• Organized Crime
• Torts, Breach of Duty and Civil Litigation

• The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets
• Common violations include asset misappropriation, corruption, pilferage, petty theft, and fictitious payroll
• Four common elements
– Activity is clandestine
– Violates the employee’s fiduciary duties to organization
– Committed for the purpose of direct or indirect financial benefit to the employee
– Costs the employing organization asses, revenues, or reserves

• Crime in the upper, white-collar class, which is composed of respectable, or at least respected, business and professional men
• Often used interchangeably with occupational fraud and economic crime
• Typically associated with an abuse of power

• Occurs when entities, companies, corporations, non-for-profits, non-profits and government bodies, otherwise legitimate and law abiding organizations, are involved in a criminal offense
• Often consists of unfair pricing, unfair business practices, and tax evasion
• Organizations can be prosecuted in a similar manner to individuals

• Common examples are money laundering, mail and wire fraud, conspiracy and racketeering
• RICO (racketeering influence and corrupt organizations act) addresses organizations involved in criminal activity
– Outlaw investing illegal funds in another business
– Outlaw acquisition of a business through illegal acts
– Outlaw the conduct of business affairs with funds derived from illegal acts

• A private or civil wrong or injury, other than breach of contract, for which the law will provide a remedy in the form of an action for damages
• Tort of contract interference
• Negligence
– Duty
– Breach
– Cause in Fact
– Proximate Cause
– Damages
• Injured party must prove two points to win award for damages
– Liability
– Damages

• Edwin H.
Sutherland
• Donald R. Cressey
• Dr. Steve
Albrecht
• Richard C.
Hollinger and
John P. Clark

• Coined the term white-collar crime
• Theory of differential association
– Basic tenet is that crime is learned
– Learning of criminal behavior occurred with other persons in a process of communication
– Criminality can’t occur without the assistance of other people
– Learning of criminal activity usually occurred within intimate personal groups

Perceived
Opportunity
Perceived
Pressure
Fraud
Triangle
Rationalization

Cressey found that the non-shareable problems arose from situations that could be divided into six basic categories
– violation of ascribed obligations
– problems resulting from personal failure
– business reversals
– physical isolation
– status gaining
– employer-employee relations

People in trusted positions refuse to admit that they lost money through some disreputable act because they think they would be admitting that they are unworthy to hold their trusted positions.

• Problems resulting from personal failures, are those that the trusted person feels he caused through bad judgment and therefore feels personally responsible for
• Because these trusted individuals fear a loss of status, the individual is afraid to admit to anyone who could alleviate the situation the fact that he has a problem which is a consequence of his ‘own bad judgment’ or ‘own fault’ or ‘own stupidity

• Differs from “personal failures, because here the trust violators tend to see their problems as arising from conditions beyond their control
• Status still plays big role in decision

• Trusted person has no one to turn to
• Doesn’t have access to associates that can help him

• Motivated by desire to improve status
– Living beyond one’s means
– Lavish spending
• Unwillingness to settle for a lower status creates motivation for trust violation

• Employed person resents status within organization but feels he has no choice but to continue working for the organization
– Underpaid
– Overworked
– Under appreciated
• “Getting even” when employee feels illtreated is a strong motivator

• General information
– Knowledge that the employee’s position of trust could be violated
• Technical skill
– Ability to commit violation
– Usually same ability that employee needs to obtain job in the first place

• Necessary component of crime before it takes place
• Necessary so that perpetrator can make his illegal behavior intelligible to him and maintain his concept of himself as a trusted person
• Often abandoned after criminal act has taken place
• Cressy placed subjects into 3 categories
– Independent businessmen
– Long-term violators
– Absconders

• Persons who were in business for themselves and who converted deposits which had been entrusted to them
• Perpetrators in this category use 1 of 2 common excuses
– They were “borrowing” the money they converted
– The funds entrusted to them were really theirs
• Almost universally felt their illegal actions were predicated by an “unusual situation”

• Take small amounts of funds from employer or employer’s client over time
• More difficult to return funds than to steal them
• Most perpetrators wanted to “clean the slate” and repay their debt
• Perpetrators often feared losing social position not possibility of punishment

• People who take the money and run
• Usually unmarried or separated from their spouses
• Tend to have lower occupational and socioeconomic status that previous 2 categories

• Assembled a complete list of pressure, opportunity, and integrity variables
• Created a list of 50 possible indicators of occupational fraud and abuse
• Variables fell into 2 principle categories
– Perpetrator characteristics
– Organizational environment
• Developed the “Fraud Scale”

Higher Fraud
Risk
Fraud
Scale
Lower Fraud
Risk

• Hypotheses of Employee Theft
– Found that employees steal primarily as a result of workplace conditions
– True costs of employee theft are vastly understated
• Employee Deviance
• Income and Theft
• Age and Theft
• Position and Theft
• Job Satisfaction and Deviance
• Organizational Controls and Deviance
• Employee Perception of Control

Employee deviance, conduct detrimental to the organization and to the employee, is primarily caused by job dissatisfaction
– Acts by employees against property
– Violations of the norms

• Absolute income is not a predictor of employee theft
• Statistical relationship between employee’s
concern over their financial situation and the level of theft

• Direct correlation between age and level of theft
• Young employees are more likely to engage in illegal conduct that runs contrary to organizational and societal expectations
– Younger employees generally have less tenure with their organization and therefore have a lower level of commitment to it
– Younger employees tend to be less committed to the idea of conforming to established social rules and structures

• Direct relationship to employee’s position and level of theft
• Thefts are highest in jobs with greater access to the things of value in the organization
• Employee’s position only affects the method and amount of the theft after the decision to steal has already been made

Employees who are dissatisfied with their jobs are most likely to seek redress through counterproductive or illegal behavior in order to right the perceived
“inequity”

• Unable to document strong relationship between control and deviance
• Believed that employee education as an organizational policy has a deterrent effect
• Concern of theft must be expressed without creating atmosphere of distrust

• The stronger the perception that theft would be detected, the less the likelihood that the employee would engage in deviant behavior
• Increasing perception of detection may be the best way to deter employee theft
– Possibility of sanctions is secondary concern to employee

• Branch of philosophy dealing with values relating to human conduct, with respect to rightness and wrongness of actions and the goodness and badness of motives and ends
• Fraudsters often make poor ethical decisions prior to committing criminal acts
Critical Thinking Exercise
Is it ethical for a fraud examiner or forensic accountant to lie to a perpetrator during an interview to elicit a confession?

• Is it legal or does the conduct violate known rules?
– Most codes of conduct avoid breaking the law
– Law might permit an action prohibited by a profession’s code of ethics
• Means and Ends
– “Fight fire with fire”
– Fail to consider other aspects and consequences of the actions

• Imperative Principle
– Tends to ignore outcomes by providing directives and rules without exception that are in the best interest of society as a whole
– Assumes all people are aware and agree to follow rules
• Utilitarian Principle
– Ethical problems should be solved by weighing the good and bad consequences
• Generalization Principle
– If all relevantly similar persons acting under relevantly similar circumstances were to act a certain way and the consequences would be undesirable, then no one ought to act in that way without a reason
• Ethics, Trust and Responsibility

• Ethics and Values as Drivers of Personal Behavior
– Individuals must make the commitment required to follow their ethical values in all cases except those that have extreme consequences
• Professional Conduct
– A Specialized body of knowledge
– Admission governed by standards and qualifications
– Recognition and acceptance by society
– Stands of conduct for dealing with the public, other professionals and clients
– An organizational body devoted to the advancement and responsibilities of the profession

• The Foundation for Fraud Prevention and Deterrence
– Ethics is the foundation for fraud prevention both by individuals within an organization and the organization itself
• Tone at the Top and a Culture of Ethical Behavior
– Ethics starts with corporate governance
• Maintain an Environment Dedicated to Fraud
Prevention and Deterrence
• React to Early Warning Signs
– Accounting Anomalies
– Weak Internal Controls
– Analytical Anomalies
– Lifestyles Symptoms
– Behavioral Symptoms
– Potential Informants

1. Know the exposures (brainstorming, risk assessment, audit planning)
2. Translate exposure into likely symptoms
3. Always be on the lookout for symptoms
4. Build audit and data mining programs to look for symptoms
5. Pursue these issues to their logical conclusion and ground decisions in the evidence (evidence-based decision making)