The Cost of Loss [Guest Post]

Fraud affects everyone. According to a recent survey, US businesses lose an estimated $400 billion due to fraud each year. The Association of Certified Fraud Examiners found that one in four employees commits fraud at some point in their careers, and a quarter of those employees worked for their employer for more than ten years! Every industry feels the loss associated with fraud, and the public often foots the bill. Despite the best efforts of auditors and accountants to detect fraud, the losses remain steady from year to year. As a question of forensic psychology, what motivates loyal and otherwise trustworthy people to take dishonest advantage of employers? Regardless of individual circumstances, we find surprisingly similar motives and means.

The many reasons for fraud can be distilled down to two main motivators: greed or need. When employees don't feel their needs are being completely addressed, they overwhelmingly turn to fraudulent actions. These often takes the form of employees stealing to “compensate” for inadequate pay raises or benefits, or an overarching sense of entitlement when employees feel “worth” more than what they're paid. This dissatisfaction with circumstances makes fraud or embezzlement especially appealing.

Employees motivated by need frequently rationalize their misdeeds because of greater personal losses: the company cut pay or benefits and the employee deserves to make up the difference, needs to pay for an expensive medical procedure, or struggles with massive personal debt. In each situation, money motivates fraud. For most employees there is little value in attempting to steal material goods, and in most corporate positions it's easier to conceal the flow of money than missing physical possessions. Additionally, stealing goods requires the embezzler to “fence” the stolen goods at a fraction of their face value.

With an understanding of the primary motivations for fraud, we need to consider the factors that enable fraudulent behavior. Of the many studies conducted on fraud in all its forms, researchers found three factors that must be present to create an environment conducive to fraud: pressure, opportunity, and rationalization. The pressures to commit fraud (greed or need) mentioned earlier explain the motivation for committing fraud, but for fraud to occur the right opportunity must exist.

Members of corporate accounting departments pull off many fraudulent acts because they have the greatest opportunities to divert funds and mask their transfer. These employees possess an in-depth understanding of how their business systems work and how to exploit any weaknesses for personal gain. In the vast majority of cases, fraud occurs because employees lack adequate oversight. Most cases escape detection until a customer returns an errant check, a fraudulent transaction fails to go through, or an external audit discovers an inconsistency. In companies that employ routine external audits and a process of double-checking employees’ work, the incidence of fraud is a fraction of that in companies without such safeguards.

The final factor of fraud is rationalization. When interviewed by forensic accountants and law enforcement officials, most perpetrators of fraud exhibit a high degree of cynicism stemming from their underlying belief that one must lie or cheat to get ahead. In a 2009 Josephson Institute of Ethics study, 51 percent of young people under 18 felt that lying and cheating are necessary to succeed. As adults, these people are far more likely to commit insurance fraud, falsify tax returns, or inflate an expense report. In each case, adults are able to rationalize their behavior because it was “part of the game.” As an expected behavior, perpetrators of fraud justify their needs being worth it. Whether it's an instance of an investor losing his seed money or a Bernie Madoff-style Ponzi scheme, the defrauders in each case view their behavior as necessary and appropriate, even as they acknowledge their wrongdoing.

Based on all we’ve discussed, fraudulent behavior seems inevitable. The good news is that people's character still plays a large role in whether they commit fraud. Our workforce is largely composed of honest, hard-working individuals who seek to do their best each day. This core work ethic along with a strong external program of checks and balances can work to limit the effects of fraud. Above all, prevention is the key. Companies must use appropriate safeguards and work to reduce employee need as a motivation in order to combat this problem.

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Allison Gamble has been a curious student of psychology since high school. She brings her understanding of the mind to work in the weird world of internet marketing.  Check out more of her work at forensicpsychology.net.