Even though most fraud perpetrators have a history of engaging in dishonest acts, fraud perpetrators actually consider themselves to be honest individuals. Because fraud perpetrators consider themselves to be honest, they must rationalize away the dishonesty of their acts. Common rationalizations include statements like, “The organization owes me”, “Nobody will get hurt”, “I deserve more” and “It’s for a good purpose.” Unfortunately, fraud perpetrators aren’t the only ones who engage in rationalization. For example, many college students rationalize excessive drinking, driving over the speed limit and/or the use of credit card spending among other activities. The difference is that fraud perpetrators engage in rationalization in order to take advantage of others.
It is interesting to note that most fraud perpetrators, when interviewed, say things like, “I intended to pay the money back. I really did.” They are sincere. In the mind of the perpetrator, he or she really intended to repay the money, and since perpetrators judge themselves by their intentions, instead of their actions, they do not see themselves as criminals.
One of the most publicized white-collar criminals of the early 2000s was Dr. Sam Waksal, CEO of ImClone. Waksal was one of Wall Street’s men of the moment. As CEO of ImClone, he had just sold an interest in a new cancer drug called Erbitux to Bristol-Myers for roughly $2 billion. Everyone expected that the Food and Drug Administration would soon approve the drug. Shortly thereafter, however, Waksal learned from a Bristol-Myers executive that the drug wouldn’t be approved. The FDA was refusing to consider the Erbitux application – not because the drug didn’t work, but because there was insufficient data to approve its use. New clinical trials would have to be conducted, and the price of ImClone stock was going to plummet. Based on this insider information, Sam Waskal told his daughter to sell her shares, thinking that the price was going to go down. He also tried to sell 79,000 of his own shares (roughly $5 million). Later on, when explaining his actions Waksal said the following: “I could sit there at the same time thinking I was the most honest CEO that ever lived. And, at the same time, I could glibly do something and rationalize it because I cut a corner, because I didn’t think I was going to get caught. And who cared? Look at me. I’m doing ‘X,’ so what difference does it make that I do a couple of things that aren’t exactly kosher?” In fact, Waksal’s rationalization had allowed him to have a long history of ethical lapses, reckless behavior, and embellishing the truth. He had been dismissed from a number of academic and research positions for questionable conduct. One former colleague said, “Cutting corners for Sam was like substance abuse. He did it in every aspect of his life, throughout his entire life.”
While most managers understand the detrimental effects that fraud has on the organization, most managers are not aware that they can actually prevent fraud from occurring. In fact, most managers simply assume that internal controls and/or internal or external auditors will detect fraud and prosecute fraud perpetrators. However, research suggests that fraud is most often discovered through tips and complaints from colleagues and/or other employees. As such, managers are in the best position to detect fraud. It is the manager, not the auditors, who can easily identify when an employee’s behavior changes, when an employee’s lifestyle changes and/or when an employee engages in unethical behavior. Furthermore, if a co-worker notices dishonest activity happening within the organization, that employee will most likely contact the manager. If the manager simply dismisses the tip, then other employees will be less likely to inform the manager when dishonesty is occurring within the organization. As a result, a manager’s behavior and attitude towards honesty and dishonesty will have a large influence on the organization and the amount of fraud that occurs. Whenever managers do receive tips or complaints, they must treat the tip and/or complaint with care. Individuals should always be considered innocent until proven guilty and should not be unjustly suspected or indicted.
Nearly all individuals who engage in fraud are under some type of financial pressure. Typically, these financial pressures are real. However, at times, these financial pressures are created through a series of bad decisions. Most fraud perpetrators will begin to steal from their employers in order to pay off these financial pressures. For example, a fraud perpetrator may steal from his or her employer in order to pay off large sums of credit card debt. The majority of fraud perpetrators will truly intend to pay back the stolen funds, although perpetrators never do pay the funds back.
Once an individual begins to steal from his or her employer, the perpetrator will almost never quit stealing. In fact, research suggests that once perpetrators pay off their immediate financial needs, they will continue to steal funds to pay for other, non-necessary goods in order to improve their lifestyle. These perpetrators will begin to buy expensive toys (such as cars and boats), remodel their homes, buy expensive jewelry, take expensive vacations, purchase a vacation home, and even buy expensive CDs, music, art and clothing. Very few, if any, fraud perpetrators actually save what they steal. As the perpetrator becomes more and more confident in the fraud scheme, he or she will continue to steal larger and larger amounts. This trend will continue until the fraud becomes so large that it is eventually discovered.
Research indicates that fraud perpetrators are people who take shortcuts to appear successful. The same motivation that motivates an individual to engage in stealing is the same motivation that compels perpetrators to seek immediate gratification. People who can delay gratification and spending are much less likely to possess the motivation to be dishonest.
In order to better understand how an otherwise honest individual can engage in fraud, consider the below confession from Dennis Greer who engaged in a fraud scheme known as kiting. Note: Kiting is a somewhat advanced fraud scheme where an individual continually writes checks from one bank account to cover spending in another bank account and vice-versa. In other words, kiting uses the float time between bank accounts to give the impression that there is money in both bank accounts. While understanding the specifics of kiting is not important, it is important to notice how the fraud became larger and larger until it was eventually discovered. Also, notice how Dennis’s spending habits increased as the fraud continued.
“I, Dennis Greer, am making this statement on my own, without threat or promises, as to my activities in regard to the activity of kiting between Bank A and Bank B. As of May 20XX, I was having extreme emotional and financial difficulties. For religious reasons, I was required without notice to move out of where I was living, and I had no place to go. Also, my grandmother–the only family member I was close to–was dying. I had to live out of my car for 3 weeks. At the end of this time, my grandmother died. She lived in Ohio; I went to the funeral and returned with a $1,000 inheritance. I used this money to secure an apartment. The entire sum was used up for the first month’s rent, deposit, and application fee. From that time, mid- June, until the first part of August, I was supporting myself on my minimum-wage job at the nursery. I had no furniture or a bed. I was barely making it. I was feeling very distraught over the loss of my grandmother and problems my parents and brother were having. I felt all alone.
The first part of August arrived, and my rent was due. I did not have the full amount to pay it. This same week, I opened a checking account at Bank B. I intended to close my Bank A account because of a lack of ATMs, branches, and misunderstanding. As I said, my rent was due, and I did not know how to meet it. On an impulse, I wrote the apartment manager a check for the amount due. I did not have the funds to cover it. I thought I could borrow it, but I could not. During the time I was trying to come up with the money, I wrote a check from my Bank B account to cover the rent check and put it into Bank A. I did not know it was illegal. I knew it was unethical, but I thought since the checks were made out to me that it wasn’t illegal.
This went on for about a week–back and forth between banks. I thought I could get the money to cover this debt, but I never did. My grandmother’s estate had been quite large, and I expected more money, but it was not to happen. After a week of nothing being said to me by the banks, I began to make other purchases via this method. I needed something to sleep on and a blanket and other items for the apartment. I bought a sleeper sofa, a desk, a modular shelf/bookcase, and dishes and also paid off my other outstanding debts–college loans, dentist bill, and credit. I was acting foolishly. No one had questioned me at the banks about any of this. I usually made deposits at different branches to try to avoid suspicion, but when I was in my own branches, no one said a thing. I thought maybe what I was doing wasn’t wrong after all. So I decided to purchase a new car, stereo, and a new computer to use at home for work. Still, I did not have a problem making deposits at the banks. But, I was feeling very guilty. I knew I needed to start downsizing the “debt” and clear it up. I began to look for a better-paying job. Finally, last week I got a call from Bank B while I was at work. They had discovered a problem with my account.
I realized then that the banks had found out. Later that day, I got another call from Bank A. They told me that what I had been doing was illegal and a felony. I was in shock. I didn’t know it was that bad. I realize now how wrong what I did was. From the start, I knew it was unethical, but I didn’t know it was indeed a crime until now. I have had to do a lot of thinking, praying, and talking to those close to me about this. I am truly sorry for what I have done, and I don’t EVER plan to do it again. All I want now is to make amends with the banks. I do not have the money to pay back either bank right now. I realize this hurts them. I want to try to set this right, whether I go to prison or not. I am prepared to work however long it takes to pay the banks back in full with reasonable interest from a garnishment of my wages from now until the full amount is paid and settled.
I committed this act because I was feeling desperate. I was emotionally a wreck and physically tired. I felt I didn’t have a choice but to do what I did or return to living in my car. I know now that what I did was wrong, and I am very sorry for it. I am attempting to seek psychological counseling to help me deal with and resolve why I did this. I feel I have a lot to offer society, once I am able to clean up my own life and get it straightened out. I pray the bank employees and officers will forgive me on a personal level for the hardship my actions have caused them, and I want to make full restitution. I have done wrong, and I must now face the consequences. This statement has been made in my own words, by myself, without threat or promise, and written by my own hand.”
– Dennis Greer
A change in an employee’s lifestyle is one of the biggest indications that fraud may be occurring. While changes in an employee’s lifestyle only provide circumstantial evidence of fraud (Indeed, lifestyle changes may be the result of inheritance, a change in a spouse’s employment, the lottery, etc), it should still send a red flag to the manager that something might be amiss.