Academic journal article Journal of Accountancy

Six Common Myths about Fraud; If Not Debunked, They Can Obscure the Existence of White-Collar Crime

Academic journal article Journal of Accountancy

Six Common Myths about Fraud; If Not Debunked, They Can Obscure the Existence of White-Collar Crime

Article excerpt

SIX COMMON MYTHS ABOUT FRAUD

If not debunked, they can obscure the existence of white-collar crime.

A solid auditing or accounting background is helpful in uncovering white-collar crime, but it's not the whole answer. Auditors now turn up only about 20% of the frauds detected. Most fraud cases are discovered by accident or are revealed through complaints by co-workers.

Nationally, employees are stealing as much as $120 billion annually, according to estimates from the U.S. Department of Commerce. Data compiled at my professional association headquartered in Austin, Texas, the National Association of Certified Fraud Examiners (NACFE), which specializes in fraud detection and deterrence, show the average bank robbery nets the criminal only about $3,200, but the average bank embezzlement is $125,000. To meet their expanded responsibilities to uncover fraud and control it, CPAs need to know more about it. In particular, they need to debunk these six myths about fraud.

MYTH no. 1--MOST PEOPLE WILL NOT COMMIT FRAUD

The notion that most people are immune to the temptation to commit fraud is probably the biggest myth of all about financial crimes. Fraud perpetrators come from all walks of life, all economic circumstances and all social classes. The public at large, including CPAs, has trouble coming to grips with a fact of life: Some people lie, cheat and steal. Sociologists suggest the reason is instinctive--to receive rewards or avoid punishment. The greater the promise of reward or the more pervasive the threat of punishment, the higher the motivation for antisocial behavior.

McKinley was about as unlikely a thief as you could find. A CPA and the only son of a Tennessee judge, he had attended the right schools, worked at a large national accounting firm and married well. McKinley eventually went to work for the right bank as chief financial officer, where he proceeded to steal $100,000 or so right under the internal auditor's nose.

In McKinley's case, as in most frauds, it was a combination of three factors: motive, opportunity and a defective set of values. He was in a financial jam and decided to "loan" himself out of it. He simply moved the money he needed to a checking account he controlled and charged it to the bank's expense. It certainly would have been easy enough to find if the internal auditor had suspected the theft because the trail was there.

The late Donald Cressey, a noted criminologist, pioneered the study of embezzlement by interviewing approximately 300 prison inmates in the 1950s. He showed that the fraud perpetrator is normally caught up in a complex web of circumstances. Cressey discovered that nearly all fraud perpetrators have three things in common: a motive, which he defined as being usually a hidden or "unshareable" financial need; a perceived opportunity to commit fraud without being detected (usually caused by weak controls); and an ability to rationalize the theft. This is normally done by calling the theft something else--for example, "borrowing" from the company to get out of a financial bind. Cressey said fraud occurs only when these three factors are present at the same time. Luckily, this does not happen too often.

W. Steven Albrecht, president of the NACFE and an accounting professor at Brigham Young University, noted similar characteristics in a study of 212 fraud cases: The motive is usually financial, the opportunity is there and the person is able to compromise his or her integrity.

Opportunity almost always relates to position. Managers are no more or less honest than the employees--they just have more opportunity to commit bigger thefts. In McKinley's case, it was a common pattern: excessive leverage, marital problems, too much control. Yet had the internal auditor not fallen for the first myth, he might have at least known whom to look at, if not where to look. Considering there are almost countless ways to defeat internal controls, knowing whom to suspect of fraud is critical to its detection. …

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