Workplace fraud is an endemic concern in almost every organisation around the world. It has the power to destroy worthy institutions, ruin the lives of good people, damage shareholder confidence and tarnish reputations. Research suggests that one-third to one-half of employees steal from their organisation, with one study claiming that 75% of people admit to stealing from their employers at some point during their lives. Employee theft is estimated to cost businesses worldwide a staggering $100 billion a year.
The big corporates have sophisticated processes and procedures to police cheating and stealing, and armies of internal auditors and security professionals guard large organisations. Yet, in the US, employee theft is 10 times costlier than street crime and is the cause of 30–50% of all business failures. But what happens in the myriad of smaller social enterprises and, particularly, non-governmental organisations (NGOs) in developing nations, where employees are often very poor and the temptation to steal is driven by a desire to ward off starvation?
Canadian-born auditor Steve Johnson, who was awarded a Doctor of Business Administration by Heriot-Watt University in November 2017, spent seven years working as a chartered accountant, international auditor and fraud examiner before looking more deeply into this disturbing global phenomenon. As the media spotlight has fallen recently on major international NGOs and charitable organisations following allegations of involvement in prostitution, this is an apposite time to look at how fraud develops in this sector.
Dr Johnson, inspired by the work of Dr Muhammad Yunus, is particularly interested in the sphere of microfinance, in which relatively small sums are at issue.
Fraud is a major problem: the average organisation around the world loses 5% of its revenues to fraud, defined as ‘any intentional or deliberate act to deprive another of property or money by guile, deception or other unfair means’.
Dr Johnson’s research focused on employee fraud at a local NGO in a small Southeast Asian nation. His study was inspired by his time working with a microfinance organisation in the same country, where the workforce is poorly trained and many people live in conditions of extreme poverty. The region had experienced years of conflict and the organisation’s role was to use finance to help promote economic stability and improve standards of living. He spent three years in the country, from 2012 to 2015, visiting many of the workers by motorbike, often riding through tropical rainstorms to reach remote areas.
“During my time, I led teams in conducting many employee fraud investigations at all levels of the organisation. I advised management and the board on all areas of the business, including developing several initiatives and policies to detect and, more importantly, prevent employee fraud in the future. This experience was very relevant to my research, as it allowed me to learn the local language and culture, and appreciate many of the intricacies of why and how certain employees engage in fraudulent behaviour,” he said.
The most common types of fraud encountered by Dr Johnson during this time were corruption, theft and manipulation of records, committed by employees at all levels of the organisation. Major contributing factors included a generally low level of employee job satisfaction, a lack of mutual respect between staff and management, and poor working conditions.
In pursuing his research, Dr Johnson wanted to find out how national culture impacts on the likelihood of fraud in the context of an NGO. This led him to look also at organisational culture and at the ‘motivations’ and ‘rationalisations’ that can lead to fraud.
The research took as its starting point Cressey’s Fraud Triangle, which is the foundation of contemporary fraud theory and helps understand why fraud occurs. The three original components of motivation, opportunity and rationalisation are what can drive an individual to commit fraud. Motivation plays a significant role in workplace fraud and is closely related to workplace conditions and employee satisfaction. While an individual’s honesty and integrity play their part, the literature shows that most employees, in any given culture, can be persuaded to commit fraud in certain situations, especially if it is encouraged and condoned in a particular workplace. Rationalisation is when an individual feels able to justify fraud because of perceived unfair treatment, for example if they feel they have an inadequate salary or should be entitled to certain extra resources and ‘unofficial perks’. In other words, they morally justify the act to themselves so as not to feel like a criminal. The Fraud Triangle has also been refined further by academics who speak of the Fraud Diamond, which is extended to include the capability of the fraudster to trick the system.
Dr Johnson set out to find out how this theory works in a poorer region. He learned from his study that culture is key. Here he took into consideration national and organisational cultures, and found that Asian and developing countries differ in a number of ways from more developed countries such as the US, Canada, the UK and Australia. Several points emerged, among them that a lack of integrity is a key determinant of employee fraud, that situational factors are a key determinant of employee behaviour, and that organisational culture is a major determinant of employee fraud. If the culture allows certain negative behaviours to go unchecked, the door is more likely to be open to fraud.
Because of the sensitivity of this subject matter, Dr Johnson has asked that the organisation and region remain anonymous. “Fraud is a sensitive topic. A lack of integrity, situational factors, honesty and morals are relevant to both the West and developing countries when explaining fraud,” he explained.
His research, which was an in-depth case study, asked local employees in the NGO to complete a questionnaire, or ‘census’, using SurveyMonkey. The NGO, set up in 2004, has one of the largest community outreach programmes in the region and prides itself on its core values of accountability, innovation and integrity. International donors insist on detailed reporting requirements and external audits to deter fraud. The census was followed up with focused interviews with employees and managers in all departments. All the research interviews were undertaken at the NGO’s head office in the capital, which staff from the districts travelled to for their monthly visits.
Dr Johnson wanted to develop a deeper understanding of the motivations, rationalisations and cultural aspects surrounding fraud in this single organisation. The census provided a rich picture of what the employees believed about various motivations and rationalisations regarding fraud in their workplace. The NGO has dealt with many forms of fraud over recent years, including nepotism, forgery, fictitious expenses, manipulated financial and non-financial documents, misuse of the organisation’s assets, and theft.
“It is difficult to quantify the impact of these frauds, but the cumulative effect is certainly material. Frauds are typically discovered by the finance team or management, and have involved a wide variety of employees. One part of the issue is the common and limited definition of what constitutes fraud, which is often restricted to misappropriating cash or other assets. It is highly likely that many instances of fraud go unreported or are quickly dismissed as not fraud,” he explained.
“Based on my experience investigating numerous fraud cases in the region with multiple organisations, I realised it was highly unusual to get honest responses from the perpetrators (even if proof exists of their wrongdoing); therefore, interviewing the perpetrators would likely be unreliable. I took a more indirect approach by asking a wider audience about fraud in general, and this was deemed to be a more realistic and reliable approach to my research,’’ said Dr Johnson.
What Dr Johnson found was a deep-seated cultural issue: an expectation to be loyal and follow those in charge – such as the government, police, elders or managers – and a belief that this should be done without question, even if employees disagree or it seems illogical. Showing disagreement, especially publicly, is considered disrespectful. In the NGO, it is important for staff to follow managers’ instructions and show loyalty. This can be problematic, however, if a manager is dishonest or fraudulent.
The census indicated that working conditions overall are quite good, and that there is a fairly high level of job satisfaction, which limits the likelihood of employee fraud. It was also clear that the organisation is firmly focused on achieving great work results. As a consequence, the work environment is cohesive: everyone is focused on the same objective. The research found that (generally speaking):
- management treats employees well;
- employees are happy to work;
- there is mutual respect throughout the organisation;
- employees receive good support and sympathy;
- there is good, two-way communication;
- salaries are sufficient and fair;
- people are honest; and
- management enforces a zero-tolerance policy for fraud.
However, not all employees experienced a high level of job satisfaction, and several undesirable aspects of the organisational culture increased the likelihood of fraud.
These include that:
- some employees perceive a lack of support and sympathy from their managers;
- managers often become angry with their staff, which includes shouting;
- many staff feel their salaries are unfair in some way; and
- most employees feel stressed at work.
Employees who perceive such undesirable aspects of an organisation’s culture are more likely to commit fraud.
DR JOHNSON’S RECOMMENDATIONS
To mitigate fraud risk, Dr Johnson recommends addressing issues that negatively impact employees’ perceived motivations and rationalisations. By doing so, management will likely increase employee satisfaction and also achieve what they desire above all else: better work results. However, he emphasises that there are many things the NGO already does well to limit perceived motivations and rationalisations. “There is already a fairly high level of employee satisfaction, as existing working conditions go a long way to keeping fraud to a relatively low level. Management should be commended for creating a generally positive and productive organisational culture.’’
His recommendations are meant to be practical and culturally appropriate, and include the following.
- Management should display the behaviour they desire to see from employees.
This includes applying the rules to everyone, and always showing respect and consideration.
- Management should seek regular feedback from employees, genuinely listen and respond appropriately.
- Managers should be encouraged to be proactive, supportive and helpful when their staff members encounter work problems, to ensure that work plans are achieved.
- Managers should ensure that their staff are properly resourced to achieve success, for example by ensuring everyone has appropriate transportation to fulfil their duties.
- Managers should show more sympathy and support for employees’ personal problems, for example by facilitating appropriate leave.
- Managers should practise being more calm and patient with their staff, and try to avoid showing anger.
- Management should adapt the salary scale to account for other relevant
considerations, such as workload and responsibilities. Salaries need to be comparatively fair throughout the organisation.
- Management should incorporate relative weightings into annual performance evaluations to better align priorities to employee evaluations and to ensure performance targets are realistic.
These recommendations could be applied to many NGOs to help them in their fight against fraud.
“This research has brought together components of several fraud models and shown the relationship to national and organisational cultures, but applied them in a unique, non-Western context. In addition, this topic is of great importance in Southeast Asia, as organisations attempt to diverge from a national culture that is characterised by widespread fraud and corruption.
“Unless organisations better understand the way the fraudster thinks, they will be unable to properly mitigate their fraud risk. If an organisation has a better understanding of the factors that lead to fraud, it can take an offensive stance against … fraud with a clear plan that limits the opportunity for fraud and minimises the impact when fraud does occur. Such anti-fraud measures can be described as efforts at prevention, deterrence and detection.”
Dr Johnson would like to thank his supervisor, Professor Pauline Gleadle, for her support and guidance throughout this research.
- Understanding employee fraud: a case study in Southeast Asia by Steve Johnson. Submitted for the degree of Doctor of Business Administration, Edinburgh Business School, Heriot-Watt University, May 2017.
Sidebar: The Fraud Diamond model.
In 2004, Wolfe and Hermanson published The Fraud Diamond, which adds a fourth component to the Fraud Triangle: the capability of the fraudster. They argue that many frauds would not have been committed had the fraudster not had the requisite capabilities (in addition to motivation, opportunity and rationalisation). Based on 15 years of observation in the US, they suggest that capability, which includes intelligence, position, ego/confidence, and the ability to coerce, lie and deal well with stress, is a necessary condition for fraud to occur. This capability is more easily observed than motivation or rationalisation. Some academics suggest that the fraudsters involved in the Enron, WorldCom, Adelphia, Phar-Mor and ZZZ Best scandals were motivated by money, ego and entitlement.