Running head: Employee Fraud Topic: Employee Fraud Name: Course: Instructor’s Name: Date: Abstract Employee fraud is a grave problem facing many organizations globally. This paper outlines the dynamics of employee fraud. It attempts to analyze the problem of employee fraud in business enterprises. It explains what employee fraud means and what causes employee fraud or rather what motivates employees to commit fraud. It also looks into the procedure of detecting employee fraud. Finally it suggests various ways of curbing the problem; the regulations, standards, control measures and ethical requirements that must be put in place, to ensure that this vice does not clip the ability of businesses to flourish. Key words: Fraud, employee, employer, pressure, rationalization, embezzlement, conspiracy, forensic. Introduction Employee fraud is one of the most serious issues undermining business success in the world. Following a great number of major scandals lately, there has been a lot of dedicated research and attention being channeled into the fight against employee fraud. Regardless of the number of employees or the type of activities that a business enterprise deals with, each business globally is highly susceptible to employee fraud. Employee fraud is a high risk vice to the business enterprise because it leads to huge and significant losses to the business. The losses incurred by the business are in terms of financial losses and damaging of the public image of the business. For instance, many clients will not trust their investments with a business enterprise which cannot safeguard even its own resources from malicious employees. The clients will express doubts on the ability of the same malicious employees to manage their investments prudently. Comprehension of the dynamics of employee fraud, what causes it, how to detect it and how to prevent it is necessary to reverse the increasing number and intensity of scandals related to employee fraud. One of the various researches on the issue of employee fraud was conducted by Price Waterhouse Coopers (PWC). According to this global economic crime study of 2009 by PWC, it was observed that the current economic turbulence is responsible for the polishing of the art of employee fraud leading to the emergence of fraud incidences of great magnitude. The number of employee scandals was also noted to be on a steep incline. Consequently this attracted a lot of attention both from the employers and the general public who were oblivious of the gravity of employee fraud in business institutions. To the employers this had the effect that it instilled a sense of caution when dealing with the employees (Timon, 2009). The employers were also forced to put in place aggressive professional regulations and ethical standards to safeguard the image of the business institution by preventing business fraud. Many business owners shifted their attitude on the business audit process being a financial records verifying process to being a way of fraud detection and prevention (Vitalija, 2011). Employee fraud Employee fraud is defined as the deliberate misuse of the assets and resources of the employer for the employee’s personal enrichment by taking advantage of ones position in the organization. Employee fraud can also be described as any deed or deeds carried out by a worker in an organization, a contractor contracted by the organization or at third party entity trusted by the organization that causes financial losses or has the potential to cause financial losses to the organization. Employee fraud is also referred to as embezzlement, occupational fraud, workplace fraud or internal fraud. Employee fraud is usually confused with terms like ignorance, negligence and error. However, employee fraud is different from these forms of unethical conduct in the sense that fraud is usually intentional and premeditated or calculated with the intention of deception (Brent, 2012). Employee fraud is not only hazardous to the organisation, but also has negative impact on the national and global economy as well. It is estimated that a U.S. business loses an average of 5%-7% annual income through employee fraud (Vitalija, 2011). This means that the economy of the country also suffers a 5%-7% setback (PWC, 2009). One of the most controversial scandals involving employee fraud is that of two former employees of the JPMorgan Chase bank. The scandal was popularly referred to as the “London whale scandal.” The scandal cost the bank $6.2 billion. The employees falsified books and records relating to trading losses. The employees were subjected to criminal prosecution in New York in 2013 (Vitalija, 2011). Causes of employee fraud The most successful way to deal with employee fraud is to focus on ways of prevention. The process of preventing employee fraud is by a great extent cheaper and consumes less time resources than dealing with the aftermath of the fraud scandal. To efficiently prevent employee fraud, it is necessary to understand what causes employee fraud (Brent, 2012). A majority of people hold the notion that greed is the prime motivating factor for employee fraud. In order to demystify these misconceptions about employee fraud, a criminologist Dr. Donald Cressey came up with a concept known as the fraud triangle (Joseph, 1997). This model that helps to understand what motivates an employee to commit fraud was based on intensive and extensive research on workplace fraudsters who he referred to as “trust violators.” According to the fraud triangle, there are three factors that must exist to necessitate the commission of employee fraud. These are pressure, opportunity and rationalisation (Brent, 2012). The first factor; pressure, refers to presence of non-shareable financial need (Joseph, 1997). This is the primary motivation behind employee fraud. Pressure describes a financial obstacle that the employee cannot handle at his or her present financial status. This includes personal problems like inability to pay the bills, a gambling addiction, drug addiction or desire to have a better car or house. The obstacle may also be a professional obstacle like the requirement to meet the output targets at place of work and the requirement to improve productivity to earn and maintain investor confidence (Joseph, 1997). Since the employee cannot solve this hurdle this problem through any transparent means, he or she starts to consider an alternative way of solving it probably through an illegal means such as pilfering or misappropriation. The second component of the fraud triangle is opportunity. Opportunity refers to the means through which the employee intends to solve the problem that he or she is faced with. It describes the way the employee anticipates to use or her position to help him or her to overcome the hurdle. It is at this stage that the employee determines which the best way is to commit the illegal act with minimal risk of being caught (Joseph, 1997). The employee is fully aware that the act they intend to execute is not appropriate. They know that they are at a risk of being prosecuted or lose the job or both if their actions are discovered. Therefore they are cautious to do everything in utmost secrecy (Brent, 2012). If they involve someone else they are likely to use a form of an arbitrative motivational means to buy their silence. A good example is where a bank employee gets access to unfilled cheque leaves. The employee may perceive this as an opportunity to use their position to steal the funds. He or she may do this by writing the cheque to him or herself. However, there is still a chance to be caught if this bank employee is not the one who will process the cheque. Therefore he or she will either need to be the one who processes the cheque or liaise with another employee of the bank who will process the cheque. The two can then share the funds according to a sharing formula that is agreed upon by them (Joseph, 1997). The third component of fraud triangle is rationalization. Most employee fraudsters are not typical criminals (Joseph, 1997). Most of them even do not have a record of criminal activities and the fraud may be their first criminal activity. They are mostly not proud of this act but they view themselves as innocent individuals who are caught up in difficult circumstances. Rationalization involves validating their acts and making them look tolerable and okay to themselves (Joseph, 1997). Most employee fraudsters will give excuses such as hey were just borrowing the money, they had to do it to sustain their family, they had to do it to avoid losing their job or the employer was unfair and he deserved to be defrauded. With these three factors in place, employee fraud may also be fuelled by other factors in the business structure including lack of or poor internal control structures. These may result from lax control measures in the organisation (Steve, 2003). Another additional factor is the situation where the manager overrules the administrative structures and control mechanisms. Since the manager is a senior employee, the junior employees are less likely to question any misappropriation on the part of the manager. Conspiracy between the workers to defraud the employer may also encourage an environment of employee fraud. Finally, treachery involving the employees and a contractor or a third party may also amount to employee fraud (Joseph, 1997). Detection of employee fraud Detection of employee fraud can be accomplished using a number of ways. In the United States of America, 32.4% of the cases of employee fraud are detected through tips, mostly from anonymous sources. 25.4% of the fraud cases are discovered by accident. This is in cases where the perpetrator do not thing through their plan carefully leading to an error that exposes their dirty deeds. Finally, 20.2% of the employee fraud cases are revealed through the audit process. The auditing process may be done for verification of records and balancing of accounts. The audit may also be done for forensic purposes where there are claims of employee fraud or where misappropriation is suspected. It may also be done to confirm allegations of misappropriation where the suspect has denied the claims (Vitalija, 2011). There is a set of unusual activity pointers or signals that aid the forensic auditors to detect instances where there may be the presence of cases of employee fraud. This unusual activity is referred to as a red flag (Steven, 2012). It signifies activities that deviate from the norm that necessitate further scrutiny (Joseph, 1997). These include vicissitudes in the lifestyle of the employee, substantial debt problems, difficult credit situations, altered behaviour trends e.g. drug abuse and gambling addiction, snubbing annual vacation, hesitance to give information to the auditors, employees being involved in recurrent arguments with the auditors, missing altered or copied documents, employees openly denigrating the regulatory bodies and auction of the organisations assets at an undervalued rate (Steven, 2012). These signals cannot be used to infer guilt but they are just an admonition for fraud. There are computer programs in business records analysis packages that help in identifying the red flags and determine the severity of the underlying issues marked by each respective red flag (Timon, 2009). Prevention of employee fraud The process of preventing and avoiding employee fraud is a broad and a comprehensive one. The administration of the organisation bears the highest responsibility when it comes to curbing employee fraud. It starts from the hiring process to the time the employee is inducted into the workforce (Steve, 2003). The first measure to prevent employee fraud is to conduct the hiring process prudently. The administration can do this by ensuring the there is sufficient background checks before the employee is employed. This will help the organisation administration to identify candidates who have a past history of professional misconduct in form of workplace fraud (Steve, 2003). It also helps the employer to determine the tendency of the employee to commit fraud depending on the potential sources of financial pressure. This includes history of drug abuse, addiction to gambling, credit problems, debt problems and divorce and mortgage status (Steven, 2012). The second way that the employer can prevent employee fraud is by scrutinising the candidate’s referees. The referees can provide invaluable information about the work ethics of the candidate and save the business from employing a potential fraudster. The third way that employee fraud can be prevented is by establishing and sensitising the workers on a reasonable code of conduct. The administration should be actively involved in the process of upholding the ethical control mechanisms to set a good example to the rest of the workforce. While this does not deter most fraudsters, it clearly lays out boundaries which when violated would amount to misconduct (Brent, 2012). Another additional strategy that can be employed to prevent employee fraud is identifying and dealing with signs of pressure. Most workers commit fraud because they do not feel appreciated at the workplace. The may also commit fraud if they are under pressure both professionally and personally (Timon, 2009). Therefore, the employer should always be on the lookout for the red flags previously identified. It is always prudent for the organisation to respond to the signs of pressure and addressing them rather than waiting until it is too late (Brent, 2012). In conclusion, cases of employee fraud have been on the rise in the previous years. They cost the economy and the respective organisations a huge sum of money. Therefore, this necessitates the need to take the necessary measures through timely intervention (Vitalija, 2011). The success of the interventions solely depends on the willingness of the organisation to address the causes of fraud and deal with these causes prudently to save the organisations from suffering financial losses. References Brent E. (2012).Forensic Fraud: Evaluating law enforcement and forensic science cultures in the context of examiner misconduct. Pp.17-44 Joseph T. (1997). Fraud and abuse: The Fraud Triangle. Obsidian publishing co. pp. 1-56 PWC. (2009). The Global Economic Crime Study. Steve A. (2003). Fraud examination: workplace fraud. Thomson south-western publishing. Pp. 17-26 Steven J., Thomas P. (2012). Red Flags for Fraud. State of New York Office of the State Comptroller. Pp. 1-15. Timon M. (2009). Employee fraud; the internal storm. Pp. 1-3 Vitalija B. (2011). An Empirical Study of Audit Expectation Gap. Pp. 1-74.
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