Economic Crime Journal

Economic Crime Journal

Dr. David Murphy is a Certified Fraud Specialist and Certified Public Accountant and is a member of the Board of Regents of the Association of Certified Fraud Specialists. In addition, he has served as the Senior Anti-corruption Advisor to the Controller General of Peru and the government of Bulgaria. He was also the director of a two-year USAID anti-corruption graduate education project in Bolivia and consulted to the Central Bank of the Philippines in the wake of a major bank fraud in Manila.

Other Posts:

U.S. Banking Fraud Interview (04/27/2009)
Financial Statement Fraud (04/17/2009)
Internet Fraud on the Rise (04/06/2009)
Fraud Close to Home (03/27/2009)
Can Economic Crime Be Eliminated? (03/20/2009)
Madoff and Ponzi (03/26/2009)
New Credit Card Scam (05/01/2008)

Fraud on Steroids

David Murphy, CPA, CFS, Ph.D.

            You have noticed that sales still aren’t what they were last year.  While the unemployment rate has declined the number of employed is still increasing.  The economy just isn’t what is used to be and that hurts the bottom line.  Occupational fraud, fraud committed against a company by employees, vendors or customers, can be just as damaging.  A company where net income is 5 percent of sales experienced a small $10,000 fraud.  The company would have to increase sales by a tremendous $200,000 to recover the lost profit!

            National White Collar Crime Center data show an increase in arrests for fraud and embezzlement during the two most recent recessions.  White-collar fraud arrests jumped 52% over the two years following the 1990 savings and loan crisis and the downturn.   Arrests jumped 25% in the two years following the Internet bust in 2000. It appears that white-collar crime clearly picks ups when there's a downturn in the economy.

            The potential for fraud increases dramatically during economic downturns and the fraud on steroids results.  Fraud risk results when opportunity, rationalization and pressure are present.  Opportunity results when individuals within or outside a company when they discover a method for stealing from a company and hiding the theft.  It can be as simple as a vendor’s delivery person offloading boxes from the delivery truck and then tossing an unattended box back into the truck to a sophisticated computer-based accounting fraud.

            However, the real concern during an economic downturn is its effect on pressure and rationalization.  People commit fraud when they face financial problems that they can’t solve through normal means (financial pressure) and then find a way to rationalize their behavior.  The Federal Bureau of Investigation suggests that the sharp increase in mortgage fraud, a 36 percent increase over last year, has been a desperate attempt by homeowners to maintain the standard of living they enjoyed before the economic crisis.

What should every business person do? 

Make sure your internal control system is strong and strengthen it where necessary,

Monitor employee behavior for symptoms that may indicate financial pressure and that could lead to rationalization.

The reduction of the risk level associate with any one of the three fraud factors, opportunity, rationalization and pressure, is reduced.