Internal Threats -- Employee (Occupational) Frauds

 

I want to know more about Search

 

The shaft of the arrow had been feathered with one of the eagle's own plumes. We often give our enemies the means of our own destruction. Aesop (620 BC - 560 BC), The Eagle and the Arrow

Internal threats can come from employees, including managers and even owners. Employees generally commit occupational frauds when a permissive environment or misplaced trust exists.

When no internal controls exist, or if they exist but are not enforced, temptation beckons employees. Or, when good ol' Florence, your bookkeeper for more years than either of you care to remember, is so trusted that no one would ever suspect her of dipping into the till, opportunities abound for her to go astray.

Tip Why They Do It Your usual TV detective type looks for motive, means and opportunity. A white collar crime investigator looks for essentially the same elements . . . plus the self-justification component that allows an ordinary person to become a criminal. Most employees perpetrate so-called "white collar" frauds when a combination of four factors exists: Motive -- The employee has some pressing financial need such as a family illness, excessive debt or a gambling problem. Means -- The employee has skills qualifying him or her for a job working with cash or other employer assets. Opportunity -- The employer's lack of internal controls or enforcement thereof, or just misplaced trust, create an environment conducive to fraud. Rationalization -- The employee convinces himself that the employer owes him something such as higher pay or more appreciation, thus justifying committing the fraud. Or, "I'm really only borrowing it; I'll replace it later . . . "

Occupational frauds committed by employees generally come in two flavors:

• Misappropriation of Cash by Employees -- Misappropriation of cash (or its equivalents) is the most common of all the employee frauds.
• Misappropriation of Non-Cash Assets by Employees -- Misappropriation of non-cash assets commonly consists of inventory theft, false purchases and false sales.

Note: Financial statement fraud is another type of occupational fraud (a la Enron, WorldCom, Tyco, etc.), but since this type of deception is usually found in large, public companies, we won't discuss it as an employee fraud for purposes of this section.