This Insights was contributed by Richard Pasquantonio, CPA/CFF, CFE, CDFA (NC License Number 33577), an associate at Adam Shay CPA, PLLC.
Occupational fraud is a complicated issue to manage. The “Fraud Triangle” receives a lot of attention in anti-fraud literature. The three elements that form the fraud triangle are: incentive/pressure; opportunity; and rationalization.
The theory suggests that all elements must be present for fraud to occur. However, a less-often discussed driver in fraud theory is a concept called detractors.Detractors are factors that contribute to a negative work environment. These factors may motivate employees to commit fraud.
Examples of detractors include:
- Management’s failure to recognize and reward good performance
- Over utilizing negative feedback while underutilizing positive feedback
- Actual or perceived inequity within the organization
- Lack of training or promotional opportunity
- Unreasonable budget expectations
- Unresponsive management
When business owners are faced with accusations of fraud within their organizations, they need to determine how to respond to those accusations and understand the effect of their responses on the external and internal perception of the organization and its stakeholders.
The following story is inspired by fact, fiction and fable. It is intended to show the complex nature of occupational fraud and the effect it has on organizational behavior and decision making.
There once was an innovative leader, a chief executive that pressed against the norms in a revolutionary way. This leader was very visible and an inspiration to all members of the organization. The organization operated with a traditional hierarchy with many levels of management between staff and executives.
It was organized into five highly competitive divisions. Each division had an executive who was responsible for three analagous departments. Department staff members were often promoted between divisions. Each division executive reported directly to the chief executive officer.
In addition, the chief executive was responsible for ancillary departments that supported the five divisions, including an audit department that covertly analyzed divisions for suspected fraud.
The organization operated within a highly competitive industry. It was pre-revenue and, whereas it had strict controls over intellectual property and fixed assets, its control over cash was loose. The organization was privately soliciting investment from a prestigious Angel.
The communication channels within the organization were formalized based on the hierarchy. While individuals were expected to exchange information through the formal channels between levels, individuals within each level communicated informally, with frequency and, often, with unequal access to superiors.
Charles, the executive of Division 1, was colluding with a major competitor. Charles provided valuable information to a competitor for money and a future promotion within the competing organization.
The organization was provided indicators of Charles’ actions. Talk of his behavior began to circulate among department staff.
Over time, accusations worked their way up the channels to division leaders and, ultimately, to the chief executive.
The chief executive discounted the weight of the accusations because they were largely unsubstantiated and there was intense competition among division leaders. The chief executive did, however, dispatch his team of auditors to determine if there was any basis to the allegations.
In time, the audit department reported back to the chief executive with some evidence that Charles was involved in a scheme to undermine the organization’s success and had harmed the organization’s ability to compete. When faced with the evidence, the chief executive decided to discount the impact of Charles’ actions and did not initiate any administrative or legal response.
Charles remained in his position as a division leader. In his determination, the chief executive considered the effect that an administrative or legal action would have on public opinion, especially in the opinion of potential investors.
Within Division 2, Ben was an exceptional department leader. Ben was a respected leader within his department. His technical knowledge and initiative were recognized throughout the organization and the industry.
Ben’s contributions to the organization were often overlooked because the formal communication channels established allowed division leaders to routinely accept credit for Ben’s achievements. This lack of recognition, compounded by Ben’s knowledge of the accusations surrounding Charles’ conduct, began to erode Ben’s loyalty to the organization.
Eventually, Ben began to emulate Charles’ behavior and profit personally by providing valuable information to a competitor. Ultimately, Ben left the organization to work for that competitor.
My goal in writing this article is to highlight how detractors contribute to incidents of fraud in organizations. Ben, a rising star within the organization, was disenfranchised by the company’s ineffectiveness at managing human resources.
This ineffective HR, coupled with a negative tone at the top and the perception of an unresponsive management team, created contempt between Ben and his employer.
This example also highlights that, in addition to the hard losses that businesses incur resulting from fraud, businesses are also at risk for soft losses that arise when otherwise productive and ethical employees are exposed to detractors within an organization.
Richard Pasquantonio, CPA/CFF, CFE, CDFA (NC License Number 33577), is an associate at Adam Shay CPA, PLLC. He focuses on forensic accounting, fraud prevention and detection, and tax controversy resolution. He is also an AICPA CFF Champion. The purpose of the CFF Champion program is to inform the professional community about the vital role of forensic accounting professionals, the knowledge required to become a CFF, and the benefits of the CFF credential. For more information, visit http://www.wilmingtontaxesandaccounting.com/ or email him at [email protected]. Pasquantonio can also be reached by phone at (910) 256-3456.
Adam Shay, CPA (N.C. License Number 35961), MBA, is managing partner of Adam Shay CPA, PLLC. He focuses on minimizing taxes and improving the financial results of entrepreneurs, and is actively involved in supporting the Wilmington entrepreneurial and startup community. For more information, visit http://www.wilmingtontaxesandaccounting.com/ or email him at [email protected]. He can also be reached by phone at (910) 256-3456.