Workplace Frauds

WORKPLACE FRAUDS Fraud

: Criminal deception; Swindle; Imposture

Pilferage

: Steal in small quantities

Swindle

: Cheat

(Dictionary meanings)

The subject of workplace frauds is of great concern and relevance to all organizations today. Professionals who are required to deal with this as part of their functional responsibilities, and those who design systems and processes in the financial and internal control domain are particularly interested in this.

A recent KPMG survey highlighted following interesting facts and figures: a. 89% of fraudsters were employees of the organization itself b. 86% of the frauds committed involved senior management (including board members) c. 91% of fraud perpetrators did not stop at one single transaction but rather committed multiple frauds. d. The most common risk that every company faces is of misuse of sensitive company information that senior executives are entrusted with and are also often in a position to override internal controls. e. The most common response of the organization on discovery of frauds/fraudsters’ identity was of disbelief and surprise.

© Anuj Goel Feb.2008

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Direct & Indirect Frauds The critical question that we wish to consider here is: -

What qualifies as a fraud?

-

Is it only theft of the material assets/ resources?

-

What about: -

Leaking company information

-

Failing to align with and work towards corporate objectives

-

Misuse of paid company time

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Sabotage of constructive work

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Poisoning of work atmosphere through gossip, politicking and the like

Frauds that involve direct loss of money or material resources are usually easy to identify and point out at while the other non-directly financial injuries, like the ones sated above, are not so easy though. It is as much, if not greater, a corporation’s loss if valuable business opportunity is deliberately ignored or let go because of complacency, disinterest and/or lack of willingness to cooperate. In the race to achieve narrow individual business targets, if one deliberately fails to protect the corporations’ interests, it is nothing short of fraud on the trust placed on the individual. While every mistake may not be termed as a fraud, what makes the critical distinction is the aspect of “intent”. Deliberately choosing to hide, ignore or overlook, or misrepresent information, or making such statements that are intended to prejudice the perceptions of the audience, would also be nothing short of fraud.

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It is these non-direct frauds that are most difficult to isolate/ identify and hence, control. 1. The underlying message of the survey is also the indication that the possibility of the occurrence of frauds increases with increasing levels

of

“misplaced

trust”,

i.e.

when

“trust”

replaces

“processes”. Making an organization “process-oriented” rather than “people-centric” is a continuous challenge and requires efforts from all concerned. The survey underlines the same through the statement of common disbelief on the discovery of the fraud/fraudster with expressions such as “how could he?” etc. This is nothing but “people” based management, when the images growing larger than the roles. Adding to this, is a scenario where perhaps the systemic controls were never reviewed or worse, not properly designed in the first place. 2. The important question is to the kind of approach to adopt. Should we be “be aware” of all or to do test checks, internal espionage, internal moral policing on all or focus on how to devise systems for prevention and control? There may not be a fool-proof method for prevention against human greed and avarice. However, mechanisms to minimize the ease of their occurrence by restricting any one individual to have easy opportunities of such kind can nonetheless be addressed. Internal Control Systems thus focus on integrated multi-disciplinary approach in such a manner that no one individual or a close group can gain complete control over any significant function without appropriate recording, reporting and interface within the organization. Historically, a recording mechanism of any kind, which may or may not even be reviewed or audited, is in itself a great deterrent for any possible misuse.

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Risk mitigation of potential losses from fraud can be addressed through a variety of means such as Fidelity Insurance, Whistle Blower Policy, Rewards and Recognition Systems, Audits, and most importantly through the appropriate Controls procedures. 3. Irrespective

of the external methods, the individual’s human

psychology plays a critical role in encouraging him/her towards fraudulent activities or otherwise and acts as an internal self-regulatory mechanism. Various HR tools and practices such as Employee Screening, Background Checks, Psycho-metric testing, etc. exist today which enable the organization to assess the quality of this internal regulatory mechanism in its prospective employees. Greed is the most commonly stated reason for such activities. More importantly but somewhat and less accepted are reasons like disillusionment, disgust or anger – on something considered unjust, say a denied promotion and/or raise or posting etc. – which may also prompt the individual to vent his emotion through perpetuation or by being complacent towards potential losses and even frauds etc. The fairness and objectivity of the rewards and recognition processes thus becomes a critical tool in the prevention and management of such fraudulent activities. 4. Corporate governance principles world wide today recognize the importance and relevance of recording all such transactions which are likely to be / seem to be causing conflict of interests. Appropriate and adequate disclosures of the same are recommended and also made mandatory in some cases. By natural corollary thus, failing to stay away from all transactions that qualify as conflict of interest and worse, failing to even disclose the same where necessary or prudent, should also tantamount to fraud on the trust and faith of the

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stakeholders. Thus when we enter into secret arrangement with our vendors and/or customers which apparently though does not appear to be in conflict, we are nonetheless exposing our position to that of relative weakness in this aspect at least. Going

forward,

corporate

managements

would

become

increasingly

answerable to stakeholders on such issues as their responsibility in this sphere would not remain limited to the routine audit and reporting requirements.

© Anuj Goel Feb.2008

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