The CFO'S Perspective

Employee Fraud Factor #3: Rationalization

Employee-Fraud-Factor-Rationalization-P3

This is Part 3 of a series on the causes of a perfect employee fraud scenario.  Read “Employee Fraud Factor #1: Pressure” here, and “Employee Fraud Factor #2: Opportunity” Part 2 here.

In case you missed Part 1 & 2, there was once a really smart guy, Donald Cressey, who created a theory that said: “If three factors were met, any ordinary, trusted person could bring themselves to commit fraud.”

In other words, given the right situation (or perhaps wrong situation), anybody could commit fraud.  Not just criminals, not simply “unethical” people, and certainly not just somebody ELSE’s accounting staff.

The three factors include:

In Part 1 we talked about the first factor, Pressure, and how a person with an apparently SECRET financial problem might feel no other option than to steal company money.

In Part 2 we discussed the second fraud factor, Opportunity, and how a person with a financial problem, and given the right Opportunity might go for it!  After all, the company has a lot more money than they do!

Rationalization

The third fraud factor is Rationalization – or the fraudsters’ self-justification that it’s somehow OK to steal.  The typical fraudster is a first-time offender, and therefore they don’t consider themselves a criminal, but rather a good person who has themselves in a giant mess.

The typical methods to justify their theft include:=

  • I’m only borrowing the money (sometimes this really is the original intention)
  • I’m underpaid, and I deserve the extra money
  • My family needs it in order to …
  • The company won’t miss it, they have lots
  • Other employees are wasting money all over the place
  • I can’t stand my boss, he/she deserves it

Three Things YOU can do:

  1. Set a good example. Create a company culture of honesty and ethical behavior. If you always do the right thing, and teach that as a company moto, others will follow.
  2. Treat your employees fairly. Your idea of fair, and their idea of fair may be different, but you can always strive to be upfront with your employees. Explain raises, bonuses (or lack thereof), promotions, and perform regular evaluations. If someone feels cheated, address it.
  3. Keep your money separate from company money. Even though it might be your company (and your money), when your employees see you take tools, use leftover work materials, or take some cash from the petty cash, your employees may think they can do the same.

This fraud factor, Rationalization, is probably the most difficult to spot and control, but you can add this as a reason you don’t want disgruntled employees.

There are many things that go into proper employee theft prevention, but it really can be easier than you think. And once you are setup with a routine, maintaining your accounting setup and control environment doesn’t take much work.

If you found this helpful,
sign up to get the next update and get
CFO’s Perspective sent directly to you.

Todd-KimballTodd Kimball is a senior accounting professional with over 15 years of expertise in the nonprofit and government sectors. He has a proven track record at tackling the most challenging nonprofit accounting issues and finding solutions that work and move organizations forward. He excels at creating process efficiencies, motivating and utilizing staff to their full potential, implementing internal controls, and providing sound technical expertise. Todd focuses on the big picture but doesn’t hesitate to dive into the details. More about Todd here: www.cfoselections.com/consulting/team/todd-kimball

Topics: Security Fraud Leadership