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Can executive fraud be prevented?

Dr Richard Bunning, Teacher

Faculty Blog

Bringing justice to executives who steal makes headlines.  But longer term and more importantly, can steps be taken to minimise executive fraud?  
 
The recent indictments of Carlos Ghosn and Greg Kelly, whether proven guilty or not, will show the many costs to the Nissan-Mitsubishi-Renault partnership. Board room turmoil, replacing top leadership, strategic partnership implications, reputation, legal costs and much more will effect not only the bottom lines of those firms but also the interests of their many stakeholders: customers, suppliers, employees and the communities in which they operate.
 
The Association of Certified Fraud Examiners (ACFE) 2018 Report to the Nations, provides fascinating insight into the forms of fraud and abuse within members’ organisations. To begin with the problems of fraud may be greater than is generally known: the report shows that for fear of bad publicity, referrals for prosecution of fraud have declined by 16% over the last 10 years.
 
The report also provides considerable insight into how fraud is conducted, who is most likely to do it, the costs, variations worldwide, mean losses, methods by which fraud is most often identified, systems that tend to prevent fraud and more.
 
Some of the findings are listed below: 
 
Fraudsters are more often males than females
 
Losses are far greater when fraudsters collude
 
Executives fleece their firms for substantially more than lower level employees
 
Fraudsters with greater tenure steal twice as much
 
Very few fraudsters (less than 4%) have prior convictions
 
Older fraudsters steal much more than younger people, as do those with university and postgraduate qualifications.
 
When examining motives, lower level perpetrators tend to steal for personal reasons: financial problems, living beyond their means or feelings of negativity toward the employer. By contrast, although some executive fraudsters steal for personal gain, more often they cook the books’ to portray enhanced business outcomes and hide failure which may threaten their jobs, or just to make themselves and their company appear to be more successful.
 
Fraud consultant Laura Downing believes that such executives see themselves as “… the great I…” and come to be greedy (I want more power, money, prestige), arrogant (I am better, smarter, superior) and feel a sense of entitlement (I deserve more money, perks, authority).
 
And a chief executive, being the top authority, may succumb to the temptation to commit fraud since they have the ability to influence board member selection, circumvent internal controls, falsify documents, give themselves large bonuses, hire friends and family, allocate company money toward non-business expenses and more.
 
The ACFE report also lists the methods by which organisations try to prevent and detect fraud: background checks, codes of conduct, internal and external audits, hotlines, fraud training and so on.  
 
Such controls help in that both the median loss and duration of the fraud are somewhat diminished with any given practice. By the same token, respondents reported that lack of internal controls was the greatest weakness in their organisations. So to develop systems to prevent fraud is a high priority in dealing with the problem. However, Downing’s view is that “…true fraud prevention comes with real punishment for crimes committed”.  Regardless, developing methods to prevent crime rather than to identify and prosecute after the fact seems preferable. 
 
It is striking to note that the 2018 findings show that by far the most frequent way that frauds were detected was through a tip, some 40%, while the next most frequent way was internal audit, a mere 15%.
 
So in spite of organisational policies, procedures and controls, because executives have so much power and opportunity to manipulate the system, fraud at the highest levels continues to be a real and ever present threat, with no easy solution.  Boards and shareholders overlook constant vigilance at their peril.
1
  https://www.acfe.com/report-to-the-nations/2018/
2
  https://www.fraud-magazine.com/article.aspx?id=4294988229