Fighting fraud in the workplace

Admit it: everyone has probably taken a box of pens and stationery home from the office even if they knew they shouldn’t. After all, a little petty larceny and a stack of notebooks won’t break the company’s bank, right?

That’s probably true (and we won’t tell), but employee fraud like embezzlement, payroll cheating, bribery, and fake invoices might. Employees committing fraud against employers, known as “occupational fraud,” is a pervasive and costly danger to companies of all sizes—by some estimates, it costs organizations around the world a total of $4.7 trillion every year.

But mitigating the problem doesn’t necessarily require draconian measures—there’s a relatively easy way to combat this massive problem, fraud-prevention experts told CFO Brew: employee financial-wellness programs.

Triangulation. Three conditions drive occupational fraud, a dynamic called the “fraud triangle”: motivation, opportunity, and rationalization. Fraudsters have the opportunity to steal; they can be driven by significant, and sometimes secret, financial pressures; and they can rationalize their actions.

“The fraud triangle gives that really great understanding as a starting point,” said Andi McNeal, VP of education at the Association of Certified Fraud Examiners (ACFE). “If you’re watching the risk landscape, you’re looking for where that pressure, opportunity, and rationalization converge.”

Take away one of those conditions and the risk of occupational fraud diminishes significantly, according to fraud experts who spoke to CFO Brew.

“Anything that helps with that piece of the fraud triangle where people feel that pressure and have that ability to rationalize, anything you could do to take that off the table is going to be beneficial,” said Amanda “Jo” Erven, president and founder of Audit. Consulting. Education. LLC.

Employee financial-wellness programs that offer personal financial counseling, education, and practical guidance can help relieve the financial pressure some employees may face, potentially mitigating a key side of the fraud triangle, according to McNeal.

“So many times the sentiment we hear from fraudsters after the fact is,’I didn’t feel like I had anywhere I could turn,’” she said. By offering financial-wellness programs, ”You’re giving them the tools and the resources, and that alone is going to alleviate a lot of the pressure on many, many individuals.”

More money, more problems. Occupational fraud is a headache for CFOs that can pose significant financial, reputational, and legal risk to organizations of all sizes.

Take the case of Dinesh Shankar. In November 2018, the former vice president of quality assurance pleaded guilty to mail fraud after causing a total loss of more than $2.5 million to his employer, Channel Medsystems, a California-based medical-device company. According to court documents, Shankar submitted “false expense reports and false invoices to the company’s finance department” that were paid to bank accounts he controlled.

Boston Scientific later cited Shankar’s alleged fraud when it later tried to back out of a $275 million buyout offer for Channel Medsystems. The dispute landed in court, costing both companies time and legal fees.

In a pre-sentencing document, his attorney wrote that Shankar was motivated to steal the money because of a “life-long fear of running out of money to support his family and a fear of a loss of a sense of security.” He was ultimately sentenced to 33 months in prison and ordered to pay $2.6 million in restitution.

Occupational fraud is widespread and expensive. The ACFE said in their biannual occupational fraud report that occupational fraud is “very likely the most costly and most common form of financial crime in the world.” PwC’s Global Economic Crime and Fraud Survey 2022 found that “46% of surveyed organizations reported experiencing fraud, corruption, or other crimes in the last 24 months.”

The ACFE estimated that organizations lose an estimated 5% of their annual revenues to fraud, theft, and corruption committed by employees.

Under pressure: People often feel increased financial pressure in times of high inflation, looming recession, and economic uncertainty, which could raise the risk of occupational fraud. The 2022 PwC Employee Financial Wellness survey, conducted in January and February of this year, found that 56% of US employees felt stressed about their finances.

For a few, this pressure could lead to crime.

To combat the occupational fraud risk that employee economic distress can pose, organizations should offer a culture of transparency and support through benefits like financial-wellness programs, said McNeal. And giving employees the tools to help them develop effective personal budgets, prepare for retirement, and manage debt can go a long way toward soothing any anxiety they might feel.

ACFE’s research shows that organizations with employee support programs, like employee financial wellness, catch fraud earlier and suffer less financial damage, according to McNeal.

“Creating an environment where individuals feel like there’s transparency both ways—they’re getting transparency, they also have the ability to be transparent—if they are facing something difficult…that alone is an incredible anti-fraud control,” McNeal said.—DA