WORKPLACE FRAUDS

Fraud : Criminal deception; Swindle; Imposture

Pilferage : Steal in small quantities
Swindle : Cheat
(Dictionary meanings)

The subject of workplace frauds is of great concern and relevance to all

organizations today. Professionals who are required to deal with this as part
of their functional responsibilities, and those who design systems and
processes in the financial and internal control domain are particularly
interested in this.

A recent KPMG survey highlighted following interesting facts and figures:

a. 89% of fraudsters were employees of the organization itself

b. 86% of the frauds committed involved senior management (including

board members)

c. 91% of fraud perpetrators did not stop at one single transaction but
rather committed multiple frauds.

d. The most common risk that every company faces is of misuse of

sensitive company information that senior executives are entrusted
with and are also often in a position to override internal controls.

e. The most common response of the organization on discovery of

frauds/fraudsters’ identity was of disbelief and surprise.

© Anuj Goel Feb.2008 Page 1 of 5

Direct & Indirect Frauds

The critical question that we wish to consider here is:

- What qualifies as a fraud?

- Is it only theft of the material assets/ resources?
- What about:
- Leaking company information
- Failing to align with and work towards corporate objectives
- Misuse of paid company time
- Sabotage of constructive work
- Poisoning of work atmosphere through gossip, politicking and
the like

Frauds that involve direct loss of money or material resources are usually
easy to identify and point out at while the other non-directly financial injuries,
like the ones sated above, are not so easy though. It is as much, if not
greater, a corporation’s loss if valuable business opportunity is deliberately
ignored or let go because of complacency, disinterest and/or lack of
willingness to cooperate. In the race to achieve narrow individual business
targets, if one deliberately fails to protect the corporations’ interests, it is
nothing short of fraud on the trust placed on the individual.

While every mistake may not be termed as a fraud, what makes the critical
distinction is the aspect of “intent”. Deliberately choosing to hide, ignore or
overlook, or misrepresent information, or making such statements that are
intended to prejudice the perceptions of the audience, would also be nothing
short of fraud.

© Anuj Goel Feb.2008 Page 2 of 5

It is these non-direct frauds that are most difficult to isolate/ identify and
hence, control.
1. The underlying message of the survey is also the indication that the
possibility of the occurrence of frauds increases with increasing
levels of “misplaced trust”, i.e. when “trust” replaces
“processes”. Making an organization “process-oriented” rather
than “people-centric” is a continuous challenge and requires
efforts from all concerned. The survey underlines the same through
the statement of common disbelief on the discovery of the
fraud/fraudster with expressions such as “how could he?” etc. This is
nothing but “people” based management, when the images growing
larger than the roles. Adding to this, is a scenario where perhaps the
systemic controls were never reviewed or worse, not properly
designed in the first place.

2. The important question is to the kind of approach to adopt. Should we

be “be aware” of all or to do test checks, internal espionage, internal
moral policing on all or focus on how to devise systems for prevention
and control?

There may not be a fool-proof method for prevention against human

greed and avarice. However, mechanisms to minimize the ease of
their occurrence by restricting any one individual to have easy
opportunities of such kind can nonetheless be addressed. Internal
Control Systems thus focus on integrated multi-disciplinary
approach in such a manner that no one individual or a close group
can gain complete control over any significant function without
appropriate recording, reporting and interface within the organization.
Historically, a recording mechanism of any kind, which may or may not
even be reviewed or audited, is in itself a great deterrent for any
possible misuse.

© Anuj Goel Feb.2008 Page 3 of 5

 Risk mitigation of potential losses from fraud can be addressed
through a variety of means such as Fidelity Insurance, Whistle Blower
Policy, Rewards and Recognition Systems, Audits, and most
importantly through the appropriate Controls procedures.
3. Irrespective of the external methods, the individual’s human
psychology plays a critical role in encouraging him/her towards
fraudulent activities or otherwise and acts as an internal self-regulatory
mechanism. Various HR tools and practices such as Employee
Screening, Background Checks, Psycho-metric testing, etc. exist
today which enable the organization to assess the quality of this
internal regulatory mechanism in its prospective employees.

Greed is the most commonly stated reason for such activities. More
importantly but somewhat and less accepted are reasons like
disillusionment, disgust or anger – on something considered unjust,
say a denied promotion and/or raise or posting etc. – which may also
prompt the individual to vent his emotion through perpetuation or by
being complacent towards potential losses and even frauds etc. The
fairness and objectivity of the rewards and recognition processes thus
becomes a critical tool in the prevention and management of such
fraudulent activities.

4. Corporate governance principles world wide today recognize the

importance and relevance of recording all such transactions which are
likely to be / seem to be causing conflict of interests. Appropriate
and adequate disclosures of the same are recommended and also
made mandatory in some cases. By natural corollary thus, failing to
stay away from all transactions that qualify as conflict of interest and
worse, failing to even disclose the same where necessary or prudent,
should also tantamount to fraud on the trust and faith of the

© Anuj Goel Feb.2008 Page 4 of 5

 stakeholders. Thus when we enter into secret arrangement with our
vendors and/or customers which apparently though does not appear to
be in conflict, we are nonetheless exposing our position to that of
relative weakness in this aspect at least.

Going forward, corporate managements would become increasingly

answerable to stakeholders on such issues as their responsibility in this
sphere would not remain limited to the routine audit and reporting
requirements.

© Anuj Goel Feb.2008 Page 5 of 5