Trusted Employee, Fraud Threat, Both?

When we think about people who defraud benefit plans, we probably picture the typical bad guys—fundamentally dishonest people who feel no remorse.

In reality, about 95% of the people who commit internal or occupational fraud, such as embezzlement or financial statement fraud, are first-time offenders, said Leslie Kirsch, senior manager at Bond Beebe Accountants & Advisors. And they may be trusted, longtime employees.

Trusted Employee, Fraud Threat, Both?

Why do good people do bad things? Kirsch will discuss what motivates and tempts people to commit fraud during her presentation at the Fraud Prevention Institute for Employee Benefit Plans July 17-18 in Chicago.

“Fraud occurs when three pieces come together, what’s called the fraud triangle,” Kirsch explained during an interview. Perpetrators:

  1. Feel financial pressure or have an unshareable financial needan issue they can’t discuss with anyone
  2. Are trusted, have access to assets and see an opportunity to steal
  3. Have a rationalization for committing the fraud. They may think, “ ‘I’m just borrowing the money,’ or, ‘The organization treats me badly, so I deserve something good,’ or it may be the financial pressure itself,” Kirsch noted.

Fraud Prevention Institute for Employee Benefit PlansIf fraud is being committed by a trusted employee who has always been honest before, how can an organization catch the culprit?

Kirsch highlighted some red-flag behavior to watch for:

  • The employee seems to be living beyond his or her means, for example, the employee who makes $50,000 and is driving a Lamborghini, the bookkeeper who is constantly going on cruises or someone who is under financial strain.
  • The employee has a closer-than-normal relationship with vendors or customers. Maybe they go on trips together or spend time together outside of the office.
  • The employee often works weekends or late nights or doesn’t take a lot of vacations. Frequently, the employee uses that time outside of work hours to commit the fraud.
  • Red flags are not proof,” Kirsch cautioned. “They’re just red flags. But if you have enough of them, where there’s smoke, sometimes there’s fire.”

It’s impossible to completely prevent fraud, but organizations can take steps to decrease the likelihood of it occurring.

[Related: How to Avoid Pharmacy Fraud]

Measures like proper supervisory review and segregation of duties are important and easy to control. Having an ethical culture makes it less likely that people working in the business will make unethical decisions and vice versa. “If you see your boss cheating on his expense reports, and you’re being told to look aside, then maybe you’re going to be more willing to cheat on your own expense reports,” Kirsch said.

An ethical culture may remove the challenge of the unshareable need. Many people who commit fraud believe they don’t have another option, but “if you have a very strong ethical climate in your organization, if you have a culture of openness, people may feel that they can share their struggles,” she said. “The tone at the top—an ethical climate and ethical leadership that flow down through your organization—is one of your key values.”

Kathy Bergstrom, CEBS
Editor, Publications at the International Foundation