This article appeared in the January 2012 issue of Southwest Florida Business Today magazine.

It is fair to say that employees are the life’s blood of any commercial enterprise.
An efficient and loyal workforce assists you, the business manager, by expanding efforts in the delivery of a product or service to market. Where would we be without our employees? 

It naturally follows when employees violate the trust placed in them you ask, “How could this happen? Why would this long-time employee steal from our company?”  You took care in your hiring practice by conducting background checks and felt confident that employee theft couldn’t happen on your watch.  Yet, here you are in a state of disbelief!

                                                         Internal Controls

The idea of protecting profits and preventing losses does not end with the hiring process.  Indeed, a program that sets up workable obstacles known as Internal Controls is essential to minimizing theft. There are protocols for setting up Internal Controls, some of which a qualified accountant can address.

Fraud investigators say that instituting a program of internal controls goes a long way toward averting employee theft.  Thoughtful and practical examination of your company’s perceived vulnerabilities is a good start.  This fraud risk assessment should include input from supervisory personnel familiar with the system’s inner workings.  Further, the study should have periodic updating to maintain its integrity.  You may want to set up a committee that meets on a regular basis to keep the issue alive. It is worth it to invest just an hour a month to update controls and review the system.  On another level, the mere existence of such a committee creates a sense of heightened awareness and discourages malfeasance.

But controls, alone, are not enough. One must gain insight into the causation of occupational theft.  The executive should realize that even his trusted employees can be persuaded to steal, given certain stimuli.  For that, we turn to the experts and an explanation of The Fraud Triangle.

                                                        The Fraud Triangle

The Association of Certified Fraud Examiners (ACFE) is the premier world wide organization involved in combating fraud.  ACFE publishes “Report to the Nations on Occupational Fraud” every two years, supplying statistics compiled by fraud investigators throughout the business sector.  The report states that employee theft is more often committed by persons without any negative past record. 

Further, the report answers that rhetorical question: “Why do seemingly honest and trusted employees turn to fraud?”

 Fraud experts have come up with the answer that makes perfect sense.  The Fraud  Triangle consists of three elements: Opportunity, Rationalization and Pressure.  In fact, without all three present, the fraud will not likely take place.  When you believe all three are present, you should ramp up your attention to that employee.

As a business manager, you need to grasp this concept and put it to use.  For example: An employee who (1) has access (Opportunity), (2) feels entitled by virtue of some perceived wrong (Rationalization) and (3) is undergoing strife in his personal life (Pressure) is a likely candidate to commit fraud. 

Of the three, Opportunity seems to be the one we have direct control over. Those Internal Controls should restrict access, thus shutting down one side of the triangle.  We should not be over confident, however, because an innovative approach or even employee collusion might be able to circumvent the process and gain access anyway.

Rationalization and Pressure, on the other hand, are less within our immediate purview.  
Rationalization examples could be, “I was passed over for promotion,” or “I do all the work…they make all the money.”  How about, “They won’t miss it anyway…nobody’s paying attention.”  Pressure may show up in the form of family sickness, divorce, and financial stress.  In short, vigilance is the key.   Awareness of what is going on in your employees’ lives away from the workplace is crucial.  Offering Employee Assistance Programs (EAP) is a smart avenue to consider when facing these issues.  

Preventing the unthinkable is possible.  Internal Controls and understanding The Fraud Triangle can make a difference.  When you spot it, you can stop it!


Dave Watts is a Certified Legal Investigator in New Jersey. For over 30 years he has conducted all types of investigations for law firms, businesses and individuals. He and Linda, his wife of over 50 years, live in both Califon, NJ and Sanibel, FL. He can be reached at (800) 950-4808 or abs@alliedbizsolutions.com.

Getting the facts…that’s what we do!

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