Employee Fraud - Three Essential Components
A survey by CIFAS, the UK’s Fraud Prevention Service, in December
2004 revealed that as a result of employee fraud there is, on average, 1,500
dismissals a year from 127 organisations, with the largest companies dismissing
over 100 staff each year. Total UK losses are estimated to be in excess of £40m
per annum, although this would seem low compared to the true cost to UK
businesses. Employee fraud may not be the most costly, but it is by far the most
common type of fraud experienced by UK businesses today.
Employee fraud at its worst was highlighted with the recent case
of Joyti De-Laurey. Following the failure of her sandwich bar business, De-Laurey
secured a temporary position as a secretary with investment bank Goldman Sachs.
Soon afterwards, she was hired permanently, only to use her position as a
trusted employee – ultra-efficient in organising the private and professional
lives of her bosses Jennifer Moss, her husband Ron Beller and Scott Mead – to
take money from their private accounts.
De-Laurey used this money to support a luxury lifestyle of
designer clothes, holidays, jewellery and a course of flying lessons. She spent
£380,000 on Cartier jewellery, £750,000 on a seafront villa in Cyprus, and had
ordered a £150,000 powerboat and a £175,000 Aston Martin. In total, she stole
£4.3m over a two-year period.
During De-Laurey’s defence, her barrister said: “Ironically and
sadly her first bitter experience with financial difficulty coincided with her
novel introduction to a Dallas-type world where huge, unthinkable sums of money
stared her in the face day in and day out.” He said, she gave in to
“irresistible temptation” and was “spellbound” by the trappings of wealth around
her. On 14 June 2004, De-Laurey was jailed for seven years.
De-Laurey’s case may be compared to that of Kevin Miller, the
former NatWest bank manager who, during a 13-month period, siphoned off £85,000
from client accounts in an attempt to mirror their affluent lifestyles.
Smith, a trusted employee who had worked for NatWest for 30
years, was transferred to manage its Kings Road branch in Chelsea. There, he
befriended a number of his customers, who invited him and his wife for meals and
on expensive holidays abroad. Smith was exposed to a champagne lifestyle, but
was unable to keep up on a salary of £42,000 a year. In an attempt to copy this
lifestyle, he ran up credit card debts of almost £120,000, which he was unable
to pay. So in December 2000, he began transferring money from the bank’s private
accounts to his own. He was eventually caught when an internal audit revealed a
paper trial that led directly to him.
During Smith’s defence, the court heard that he had become
frustrated with the gap between his lifestyle and that of some of his customers.
On 16 July 2004, Smith was jailed for 15 months.
These cases differ greatly in terms of the size of the fraud and
the fact that Smith was a trusted employee of 30 years compared to De-Laurey,
who moved quickly from a temporary to permanent position, with access to the
private accounts of the bank’s senior employees. But where there are
similarities is in the underlying reasons for why these individuals committed
fraud.
Research has shown that all types of fraud demonstrate three
essential elements:
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Opportunity
-
Pressure
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Rationalisation.
These elements are commonly referred to as the ‘Fraud Triangle’.
The first and most crucial element of the triangle is
opportunity. Many businesses unwittingly create opportunities for dishonest
employees to commit fraud by exercising weak controls such as poor supervision
and lack of segregation of duties. For example, no one employee should be in a
position to prepare, sign and record cheques in a cashbook. This scenario
presents the perfect opportunity to commit fraud by allowing employees to write
cheques to themselves or pay their own bills and record them as payments to
legitimate expense accounts.
Both De-Laurey and Smith were trusted employees in a position to
access bank accounts without immediate detection. Therefore, they had the
opportunity to commit fraud. In her defence, De-Laurey’s barrister even stated
that: “The opportunity to steal was put on a plate by others.”
The second element of the triangle is pressure. While few
employees would take the opportunity to commit fraud, adding an element of
pressure could sway an honest worker. Pressure may come from the individual’s
personal life due to financial problems or addictions such as gambling or drugs.
Pressure can also come from the work environment such as the need to reach
profit targets at any cost.
In one recent investigation, a divisional finance director was
under severe pressure to meet head office targets. The individual manipulated
management accounts to satisfy head office. Although he intended to sort out the
problem in the following quarter, he didn’t. Instead the fraud was compounded
every quarter until the business went bust.
De-Laurey’s failed sandwich bar had left her with debts of over
£50,000; she also had personal financial difficulties. The combination of the
personal financial pressures and envy led her to commit one of the largest
employee frauds in the UK. In the case of Smith, he ran up credit card debts of
£120,000 and it was this financial pressure that led him to siphon money from
his clients’ bank accounts.
The third and final element to the triangle is rationalisation or
justification. This is when fraudsters justify their actions to themselves.
Examples include: ‘I’m only borrowing the money, I’ll pay it back’, ‘They owe it
to me’, ‘I deserve more money’, ‘Everybody’s doing it so why can’t I?’ and ‘The
company has lots of money, they won’t miss it’. In De-Laurey’s case, her
rationalisation was that the money was a ‘reward’ for her ultra-efficient
organisational skills. On the other hand, Smith felt he deserved more than his
annual salary.
Combining these three elements is a dangerous recipe for
individuals to commit fraud. So what can be done to detect and prevent it? It is
crucial for businesses to remove opportunities for individuals to commit fraud
by improving their internal controls. They should ensure all individuals are
aware of the controls in place and are left in no doubt that any fraud will be
detected. This perception of detection can in itself be an effective deterrent.
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