Occupational fraud is a critical issue in many organizations, especially when committed by executives in high-authority positions. Executive fraud often results in significant losses and understanding the mechanisms behind it can help companies protect themselves. The median loss from these fraud schemes is $337,000, compared to $50,000 for rank-and-file workers, according to Occupational Fraud 2022: A Report to the Nations. This biennial report, published by the Association of Certified Fraud Examiners (ACFE), also reveals that roughly 23% of frauds are committed by executives, including owners, CEOs, and CFOs. Companies and nonprofits may be able to thwart executive-level fraud by focusing on the three critical elements of the fraud triangle.
First, perpetrators must experience some type of pressure that motivates them to commit fraud. Pressure can come from within organizations – for example, pressure to meet aggressive earnings or growth targets. Alternatively, pressure could be personal, such as the need to maintain a high standard of living or pay off debt from credit cards, medical bills, or gambling.
Executives tend to feel “lifestyle” pressures. For example, they might need to drive an expensive car to prove they’ve “made it.” Or they might feel pressure to pump up revenue or profits to impress investors or lenders.
To minimize pressures to commit fraud, it’s important to compensate executives fairly and set realistic performance goals. Employee Assistance Programs (EAPs) that provide counseling and other help to troubled employees can also relieve pressures, especially when employees are dealing with addictions or family crises.
Executives have unique opportunities to commit fraud that aren’t available to lower-level employees. Their positions of authority may allow them to bully or intimidate subordinates and override controls that would otherwise detect fraud. These factors can make it harder to detect executive crimes, causing such frauds to incur higher losses and last longer. In fact, the ACFE reports that the median duration of fraud committed by an owner or executive is 18 months, compared to just eight months for rank-and-file employees.
A strong system of internal controls is a company’s first line of defense against executive fraud. Effective measures may include whistleblower reporting hotlines, fraud training programs, and audits. It’s important that executives perceive that someone (such as an internal or external auditor) is overseeing their work – and that suspicious behaviors will be reported and investigated.
The third leg of the fraud triangle is a perpetrator’s ability to justify dishonest behavior. When perpetrators rationalize wrongdoing, they overcome ethical barriers that generally guide their conduct. For example, they might tell themselves that they’ll pay back the money before anyone misses it. They may reason their employers can afford financial losses – or that they’ll lose everything if they don’t commit fraud.
Changing a would-be fraudster’s mindset can be challenging, especially when substance or gambling addictions are clouding someone’s thinking. Organizations may be able to get inside a perpetrator’s head by communicating zero-tolerance antifraud policies and providing tangible consequences for dishonest behaviors, such as termination, probation, criminal referrals, and civil actions. Fostering a supportive workplace – rather than a cut-throat, win-at-all-costs culture – can also make it harder for executives to rationalize dishonest behaviors.
All organizations should conduct risk assessments to identify the areas where they’re most vulnerable to fraud perpetrated by C-suite executives. Forensic accounting experts can perform independent assessments and recommend corrective measures as well as investigate suspicious behaviors to detect fraud early and minimize potential losses.
Executive fraud is a significant risk to businesses, with the highest losses often originating from those in positions of authority. By understanding the elements of the fraud triangle – motive, opportunity, and rationalization – organizations can implement measures to mitigate these risks. Offering fair compensation, maintaining robust internal controls, and fostering a culture of integrity are essential to curbing fraud. Additionally, regular risk assessments can help identify vulnerabilities and address issues before they escalate.
At Meaden & Moore, our forensic accounting experts are here to help you safeguard your business from executive-level fraud. Whether you need assistance with risk assessments, fraud investigations, or implementing strong internal controls, we have the expertise to protect your organization. Contact us today to learn how we can support your efforts to prevent and detect fraud.