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Rotten apples in the barrel
06 Oct 2020
Organisations face numerous risks in their operations. Such risks can be driven by economic downturns, natural disasters, regulatory or technological changes, and hits to reputation amongst others. While fraud is just one of the entries on the risk list, this is universally faced by all organisations and whilst most employees tend to be honest and hard-working, unavoidably, there will be others that are dishonest and will try to bite the hand that feeds them. The uncomfortable truth is that some employees hired to enhance the resources of the company and to make it economically viable will try to obtain a personal gain at the company’s expense. In this light, it is not enough for organisations to take measures against external fraud, they must at the same time keep a watchful eye on their own employees. 

The association of certified fraud examiners (ACFE) defines occupational fraud as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organisations resources or assets”. 
Occupational fraud can take various forms, but it is mainly divided into three categories: asset misappropriation, financial statement fraud and corruption. Asset misappropriation occurs when a trusted employee becomes a perpetrator by stealing or misusing the assets of the company. Asset misappropriation is the most common type of occupational fraud and although it is the least harmful type of internal fraud it should not be ignored, as frequent occurrences might spread and have a snowball effect resulting in costly damages.
Financial statement fraud is a scheme in which an employee intentionally causes a mis-statement or omission of material information in the organisation’s financial reports. Financial statement fraud does not provide the employee with a direct financial benefit and although it is not committed frequently it can prove to be massive in terms of harm caused to the organisation when it occurs.
Although society tends to associate corruption to politics and government employees, it can in fact occur in all sectors. According to Transparency International (TI), corruption “is the abuse of entrusted power for private gain”. Gain does not necessarily mean financial income and it can be committed by more than one person, where culprits and accomplices collude and work in tandem to achieve a common objective. It is not easy to detect corruption as the perpetrators tend to be very adept at hiding their actions by entering into secret agreements by word of mouth and generally making the payment in cash, thus making sure they leave no paper trail.
A very common question asked by many organisations is, what leads an employee to commit occupational fraud? Cressey’s fraud triangle is perhaps the most engaging theory relevant to occupational fraud. This theory explains that every case of occupational fraud is instigated by three elements: motivation, opportunity, and rationalisation.      
The pressure or need for more money initiates the motivation process. Common pressures include drugs, alcohol, and gambling addictions amongst others. Opportunity is perhaps the most important element of the fraud triangle because without opportunity a crime cannot be committed. Opportunity is created because employees need access to assets to carry out their tasks. Opportunity coupled with poor internal controls and lack of awareness will make occupational fraud easier to commit. 
Rationalisation, which is the last element of the fraud triangle is considered as the oxygen that keeps the fire burning. Rationalisation is the process that enables potential offenders to convince themselves that the deviant act that is being contemplated is within the bounds of legality. This is something easily conceived by employees embracing low moral values. Typical excuses include lack of promotions, owed bonuses or a salary increase that was never received. For organisations, tackling the rational process is extremely complex as it is impossible to gain control of or to know what is going through the minds of the employees. 
Fraud may be difficult to detect because fraudsters are innovative, and can figure out ways to circumvent defences as soon as these defences are raised. Opportunities to commit fraud are greatest in areas with weak internal controls and a lack of segregation of duties. Implementing a well-designed and well-defined anti-fraud strategy may go a long way in helping the organisation pre-empt the occurrence of occupational fraud. The first premise of this strategy should be that, however slim the chances of occupational fraud might appear to be, no organisation is immune to it. 
Employees at management level need to send a loud and clear message that impunity does not form part of the prevalent culture of their organisation. They should lead by example and behave and act in accordance with both written and unwritten ethical rules that govern the operations of the workplace. However, this does not mean that employees at management level should place themselves in an ivory tower. Real or imaginary barriers at the workplace should be removed. That is why managers are often expected to adopt an open-door policy encouraging open communication between management and employees. This will in turn eliminate or at least mitigate the “us and them” mentality which often creates mistrust and suspicion. In such a climate the employees would comprehend the rationale of pre-emptive measures such as mandatory vacations, job rotations and segregation of duties.   
Anti-occupational fraud measures must be complemented by internal controls which include reviews of the work of employees. Whistle blowing policies and anonymous hot lines can also add to the effectiveness of these measures. However, the most diffused idea about ways to prevent occupational fraud is education and training. An educational programme is often designed to help the participants internalize the norms and values that are consonant with the ethics of the company and the standard of behaviour which is expected of every employee. Educational and training programmes should be designed in a way to make employees aware of what they should look out for, particularly being able to identify behavioural red flags.
These anti-fraud strategies, measures, educational programmes, and training sessions, however well designed will not eliminate occupational fraud. Rotten apples are bound to be found in the barrels but the price of doing nothing is a price too high to pay for organisations.
This article was written by Josef Galea and published on the Sunday Times of Malta on the 4th October 2020. Josef Galea MSc CFCCS, BA (Hons) Criminology is a Transaction Monitoring Analyst at Bank of Valletta.

Any views, assumptions or opinions expressed in this article are those of the author. Issued by Bank of Valletta p.l.c., 58, Triq San Żakkarija, Il-Belt Valletta VLT 1130. Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking in terms of the Banking Act (Cap. 371 of the Laws of Malta).

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Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap. 371 of the Laws of Malta) and the Investment Services Act (Cap.370. of the Laws of Malta).