Negative Work Environment Can Lead to Fraud

In a previous post we discussed how important it is for management to set the tone at the top related to work ethic and integrity at the office. In addition to their positive examples, another way top executives can influence and even prevent unethical behavior from employees is to create a positive work environment.

If workers have a high morale and feel valued at their place of work, they will want to take care of the company and make it successful. A negative work environment can lead to low morale or loyalty. According to the Association of Certified Fraud Examiners, unhappy employees will be more prone to committing fraud because they feel no obligation to protect the company.

According to the report, “Management Antifraud Programs and Controls: Guidance to Help Prevent, Detect Fraud” from the American Institute of CPAs, these are some of the components that make up a negative work environment:

  • No reward or recognition for appropriate behavior and      job performance
  • Negative feedback
  • Perceived organizational inequities
  • Autocratic rather than participative management
  • Unreasonable budget expectations or other financial      targets
  • Low organizational loyalty
  • Fear of delivering “bad news” to supervisors and/or      management
  • Less-than-competitive compensation
  • Poor training and promotional opportunities
  • Unfair, unequal or unclear organizational      responsibilities
  • Poor communication practices or methods within the      organization

On the flip side, to create a positive environment, management should consider focusing on the following:

  • Recognition and reward systems are in tandem with goals      and results
  • Equal employment opportunities exist
  • Team-oriented, collaborative decision-making policies      are encouraged
  • Compensation and training programs are professionally      administered

Contact us if you have questions on setting the tone at the top for your organization, or if you feel a review of your internal controls and systems is in order.

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Find Deviant Behaviors, Find Fraud? (Fraud Magazine)

Human Resources Issues Could Uncover Worse Crimes

By Ryan C. Hubbs, CFE, CIA, PHR, CCSA

Sophisticated fraudsters may be able to conceal their frauds, but they may not be as adept in hiding their workplace deviant behaviors. Identifying or recognizing a correlation between the two, even if the correlation is weak, could significantly improve the anti-fraud profession’s ability to uncover fraud. On his first day on the job, Joe started viewing “adult” movies on his company computer and paying for them on his company-issued credit card. He continued this behavior during his six years with the nonprofit and racked up more than $4,000 in inappropriate charges. But that wasn’t all. After Joe resigned, an audit of cash collections showed Joe took more than an additional $50,000 in donations. Another audit of the cash disbursement account also revealed Joe was writing checks payable to “cash,” and personal checks written from this account totaled more than $28,000. In the end, Joe’s frauds totaled more than $82,000. The company prosecuted Joe, and he received probation.
Throughout my career, when investigating fraud complaints, I would find that suspects often also would have problems with pornography, bullying, harassment and other human resources issues. Conversely, when I would be called in to investigate human resource complaints and issues, I occasionally would find one or more fraud schemes involving these individuals.

Click here to read more of the article, or contact us for a PDF of the full piece.

Setting the Tone-at-the-Top

Within any company, the attitudes, values and work ethic set within management will trickle down to the rest of the employees.  Workers will follow the lead set by those who lead them, and they in turn will do what they see done and set an example for those who come after them. Dress code is a great example – if the boss wears a suit every day, then his employees will see that the priority is on traditional corporate dress and wear a suit as well. If he shows up in khaki cargo shorts, then they will feel comfortable dressing casually in the office.

The area that leadership should be most concerned with setting a positive example is with ethics, integrity and financial controls. The fact that the boss shouldn’t commit a felony or embezzle money may seem obvious, but if the management regularly lets ethical issues slide in order to make the company look good, or to keep a client relationship, it sends a message to employees that other loose standards are allowed as well.

If there is a lax control environment within a company, it may be caused by lack of diligence by executives to stay true to moral and ethical leadership, leading to greater likelihood of abuses by the employees. Setting the right tone at the top can be the difference between an environment and culture that cultivates fraudsters and one that refuses to allow unethical behavior of any kind.

In the 2010 Report to the Nations on Occupational Fraud and Abuse from the Association of Certified Fraud Examiners (ACFE), reported frauds exceeding $1 million had a common deficiency: a poor tone at the top.  It was suggested that businesses consider the following questions developed by the ACFE to gauge the effectiveness of fraud prevention efforts, with regard to management climate/tone at the top:

  • Are employees surveyed to determine the extent to which they believe management acts with honesty and integrity?
  • Are performance goals realistic?
  • Have fraud prevention goals been incorporated into the performance measures against which managers are evaluated and which are used to determine performance-related compensation?
  • Has the organization established, implemented and tested a process for oversight of fraud risks by the board of directors or others charged with governance (e.g., the audit committee)?

These are questions all business leaders should consider and based on their answers, make changes within their organization to ensure that the proper tone is being set by management.

Lack of Internal Controls Impacts Two Companies Caught in Fraud Scheme

Tina and Russell Wipff were recently indicted for felony theft in Lubbock, Texas for allegedly stealing $500,000 from the Lubbock Independent School District over an eight-year period.  As a Certified Fraud Examiner (CFE) and Certified Public Accountant (CPA), this fraud scheme stood out to me because it involves circumventing internal controls of both the school district and the couple’s employer Sodexo, which has been a landscape and facilities contractor of the school district for over 20 years.

The  couple allegedly purchased supplies, electronics and grounds-keeping equipment on behalf of the school district, with costs reimbursed by Sodexo; however, the equipment was sold on eBay and the money was pocketed. There are a variety of internal controls that may have effectively prevented or resulted in earlier detection of these occupational fraud and fraudulent billing schemes.

Occupational Fraud

According to the Association of Certified Fraud Examiners (ACFE), employees who steal inventory often are highly trusted within their organizations, warranting easy-access to secure areas and possibly keys for after-hours access.[A]  A sampling of typical internal controls that may have thwarted these losses at the contractor, Sodexo, include:

  • Monitor purchases.  There should be at least two levels of approval for capital expenditures.  That way, the receipt of purchased products would be anticipated by others within an organization, lessening the risk of diversions from purported uses.
  • Limit access to supplies/inventory.  Restricting unauthorized access to the users of certain equipment would be another way to discourage diversions (assumed to be part of Sodexo’s responsibility).
  • Physical inventory and invoice tracing.  Periodically, equipment purchase records should be compared with physical inventory records to ensure that accountability for expended funds.  Since these schemes spanned over an eight-year period, annual physical inventories may have been adequate to detect the misappropriations (assumed to be part of Sodexo’s responsibility).
  • Compare budgets.  Budgetary control is a useful tool for schemes that are reliant on over-purchasing.  In this instance, concealment of the thefts would have been easier because the equipment costs were most likely reimbursed by the school district, resulting in no net cost to Sodexco, along with an apparent lack of accountability for purchases.
  • Analytical review of sales invoices. Fraud indicators may become immediately clear from review of details.  Here, Tina Wipff was purchasing and selling electronic items such as graphing calculators and smartphones. Were those purchases relevant to services performed for the school district?  Likewise, were the purchases reimbursable by the school district, or overhead expenditures of the contractor?

 

Fraudulent Billing Scheme

According to the Association of Certified Fraud Examiners, in purchasing schemes, the fraudster buys something with an organization’s money, then takes the purchased item for himself or converts it into cash.[B]  In this case, although the fraudster couple was employed by Sodexo, the ultimate victim sustaining losses was the school district.

The pertinent issues here are whether billings from Sodexo were in accordance with the underlying contract, and whether the school district was receiving value for its disbursements.  A sampling of typical internal controls at the school district that may have thwarted these losses include:

Receipt of goods and services.  There should be a monitoring process in place to ensure the receipt of good and services, prior to payment of the vendor invoices.  Typically, invoices would be matched up with receipt acknowledgement from within an organization, to minimize the risk of overpayment.

Analysis of purchases.  Budgets should be used for monitoring purchases, including approvals by responsible parties.  Periodically (monthly or quarterly), actual expenditures should be compared with budgeted amounts, with variances analyzed and explained.

Purchase requisitions.  Oftentimes, purchases may be effectively managed by using a purchase requisition process, whereby purchases are not made without approval by appropriate department heads.  In this instance, losses may have been eliminated or at least minimized, if approval from within the school district was required before purchases were made in order to establish a base-level of accountability.

Approval of payment.  Details of invoices from the contractor should be thoroughly analyzed and understood by the school district prior to payment, and be supported by receipt acknowledgement from within the organization.  Here, it is clear that the substance underlying disbursements by Sodexo were not fully understood, possibly because the true nature of costs being paid were sufficiently hidden on the Sodexo invoices.

 

Concluding Comments

Sound internal controls help mitigate the risks of loss, whether from internal or external sources.  As this case illustrates, additional vulnerabilities are created when significant functions and responsibilities are transferred to outsiders.  Those vulnerabilities create “hidden” risks that should be understood with the help of a CFE who can help implement additional control procedures within your company.

Mike Rosten is a Principal at Piercy Bowler Taylor & Kern CPAs and Business Advisors. You can reach him at mrosten@pbtk.com.


[A] Wells, Joseph T., Corporate Fraud Handbook, John Wiley & Sons, Inc. 2004, Hoboken, NJ, p. 253.

[B] Wells, Joseph T., Corporate Fraud Handbook, John Wiley & Sons, Inc. 2004, Hoboken, NJ, p. 194.

Inside the Mind of a Fraudster: ACFE Article

From the President of the Association of Certified Fraud Examiners (ACFE):

Tips for Leaders to Help Put a Stop to Fraud by James Ratley

What makes a fraudster tick? As anti-fraud experts, we are often asked questions such as:  What makes some people commit fraud while others would never conceive of crossing that ethical line? And what causes one person facing financial hardships to steal from his employer and another to find a more honest way to pay his bills?

I also wonder what goes through the minds of individuals as they’re making that choice – that first decision –  to commit fraud. How do they rationalize or justify their actions, and do they feel guilt, stress, or even excitement when they actually cross that line into breaking the law?

Click here for the full article.