Fraud Theories

Dr. Raymond S. Kulzick, CPA, CFE

St. Thomas University
Miami, Florida
Copyright 2004 R. S. Kulzick

Fraud Theories

Sutherland White Collar Crime

Cressey Fraud Triangle
Albrecht Fraud Scale
Hollinger - Clark Study

Edwin H. Sutherland

1939 First defined white-collar

crime
Criminal acts of corporations
Individuals in corporate capacity

Theory of differential association

Crime is learned
Not genetic
Learned from intimate personal groups

Cresseys Offender
Types

1. Independent businessmen
Borrowing
Funds really theirs

2. Long-term violators

Borrowing
Protect family
Company cheating them
Company generally dishonest

Cresseys Offender
Types

3. Absconders

Take the money and run

Usually unmarried, loners
Blame outside influences or
personal defects

The Fraud Triangle

PRESSURE

OPPORTUNITY

RATIONALIZATION

Nonsharable Problems

Violation of ascribed obligations

Personal failures
Business reversals
Physical isolation
Status gaining
Employer-employee relations

Pressure

Financial
Vice
Work-related
Other

Opportunity

Controls
Environment
Accounting
Procedures

Performance quality
Discipline perpetrators
Access to information
Ignorance, apathy, incapacity
Audit trail

Rationalization

They owe me
Borrowing
Nobody will get hurt
I deserve more
Its for a good purpose

W. Steve Albrecht
Nine motivators of fraud
1. Living beyond means
2. Overwhelming desire for personal
gain
3. High personal debt
4. Close association with customers
5. Pay not commensurate with job

W. Steve Albrecht
Nine motivators of fraud
6.
7.
8.
9.

Wheeler-dealer
Strong challenge to beat system
Excessive gambling
Family/peer pressure

The Fraud Scale

Situational pressures
Immediate problems with
environment
Usually debts/losses

Perceived opportunities
Poor controls

Personal integrity
Individual code of behavior

The Fraud Scale

Hollinger-Clark Study

Hollinger-Clark study (1983)

Surveyed 10,000 workers
Theft caused by job
dissatisfaction
True costs vastly understated

Employee Deviance

Two categories:
Acts against property
Production violations (goldbricking)

Strong relationship: theft and

concern over financial situation

Age and Theft

Direct correlation
Younger employees less
committed
But, higher position = bigger theft
Opportunity is only a secondary
factor

Job Satisfaction and

Deviance

Dissatisfied employees

More likely to break rules

Regardless of age/position
Trying to right perceived inequities

Wages in kind

Organizational
Controls

Some impact, but limited

Hollinger studied five aspects:

Company policy
Selection of personnel
Inventory control
Security
Punishment

Hollingers
Conclusions

Employee perception of controls is

important
Increased security may hurt, not help
Employee-thieves exhibit other deviance
Sloppy work, sick leave abuses, etc.

Management should be sensitive to

employees
Pay special attention to young employees

Hollingers
Conclusions
Four key aspects of policy
development
1. Understand theft behavior
2. Spread positive info on company
policies
3. Enforce sanctions
4. Publicize sanctions

Overall Conclusion 1

Perpetrators feel justified

Must counter this
Morally
Legally
Consequences

Overall Conclusion 2

Concept of wages-in-kind
Hire the right people
Treat them well
Have reasonable expectations

Overall Conclusion 3

Controls must pose a visible and

highly likely threat of
apprehension
Perception of detection is the
greatest deterrent
Hidden controls do not deter
Controls cannot be predictable