Professional Documents
Culture Documents
PREVENTING FRAUD
Discussion Questions
1. Three factors are crucial in creating a culture of honesty, openness, and assistance:
hiring honest people and training them in fraud awareness; creating a positive work
environment; and providing employee assistance programs (EAPs).
2. Five methods that companies can use to reduce actual or perceived opportunities for
fraud are as follows:
a. Install good internal controls.
b. Discourage collusion, and alert vendors and contractors to company policies.
c. Monitor employees, and install tip hotlines.
d. Create an expectation of punishment.
e. Proactively audit for fraud.
3. Clearly defined codes of ethics delineate between what is acceptable and what is
unacceptable. Having employees periodically read and sign the company’s code of
ethics not only reinforces their understanding of what constitutes appropriate and
inappropriate behavior; it also underscores the fact that their behavior is important to
the company. Expectations are clarified, and clear expectations reduce fraud. Clearly
specified codes also inhibit rationalizations, and, as previously discussed,
rationalization is an important element of nearly every fraud.
4. The most widely recognized way to deter fraud is with a good system of internal
controls. Internal controls include a good control environment, a good accounting
system, and good control procedures as well as good communication and monitoring.
5. Much collusion can be prevented by simply enforcing mandatory vacations or job
transfers, because collusive fraud develops slowly (it takes time to get to know others
well enough to trust that they will cooperate and not blow the whistle). When
organizations leave one employee in close contact with the same vendors or
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customers for long periods of time, the risk of individuals deciding to profit
personally increases dramatically.
6. Sometimes otherwise innocent vendors and customers are drawn into fraud by
perpetrators because they fear that if they do not participate they will lose the
business relationship. In most cases, such customers or vendors have only one or two
contacts with the firm, and the person who requested illegal gratuities or suggested
other types of illegal behavior often intimidates them. A periodic letter to vendors that
explains the organization’s policy of no gifts or gratuities helps vendors understand
whether company buyers and sellers are acting in accordance with the rules. Such
letters clarify expectations, something that is very important in preventing fraud.
Many frauds are uncovered when, after receiving such a letter, vendors express
concern about their buying or selling relationships.
7. People who commit fraud and hoard their proceeds are virtually nonexistent.
Perpetrators almost always use their stolen money to support expensive habits.
Organizations can monitor their employees by paying close attention to the enhanced
lifestyles that result from these expenditures and by listening for verbalized
rationalizations.
8. Proactive fraud auditing is conducted by following four steps: identifying risk
exposures, identifying the fraud symptoms for each exposure, building audit
programs that proactively look for symptoms and exposures, and investigating
identified symptoms.
9. Even with advances in technology, fraud is most commonly detected through tips. A
good whistleblowing program is an extremely effective prevention tool. When
employees know that colleagues have an easy, anonymous way to report suspected
fraud, they are more reluctant to commit fraud.
10. When placed in an environment of low integrity, poor controls, loose accountability,
or high pressure, people tend to become increasingly dishonest. While a few people
probably will not become dishonest at any point (about 30%), a large portion of the
population will be influenced by negative stimuli and eventually cave to dishonesty.
In essence, this phrase means that a lot of people have a point where if the payoff is
high enough, they will be dishonest.
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11. Along with the standard interviewing, background and reference checks, some
institutions are now conducting credit checks, checking employee’s fingerprints
against law enforcement records, drug testing, and penandpencil honesty tests.
12. The Pygmalion effect states that when expectations are set below average, results will
be substandard. This relates to fraud in that if we expect people to be dishonest, they
will often be dishonest. However, if we create a culture of honesty and expect
employees to be honest, then employees will often be honest.
Multiple Choice
1. e
2. e
3. e
4. b
5. d
6. c
7. a
8. c
9. b
10. c
11. d
12. b
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13. b
Short Cases
Case 10
The chapter states that a major factor in preventing fraud is to create a culture of honesty,
openness, and assistance. In this case, there was no openness or assistance. No one
communicated with this employee. Rather than assisting him, they treated him poorly and
talked down to him. Fraud is usually high in this type of environment because employees see
the company and its owners as adversaries rather than supporters.
Case 11
Jorge is a high risk for fraud because he is facing significant financial pressures to repay his
student loans and because of his credit card debt. He is depressed, and has an alcohol
problem, all of which will add to the desperation that often leads to employee fraud. An EAP
could help Jorge deal with his financial, substance abuse and psychological problems and
help him lead a financially healthy life. An EAP could help Jorge get medical assistance for
his depression, and he could also get drug counseling for his alcohol problem. This assistance
would reduce the likelihood that Jorge would succumb to the temptation to commit fraud.
Case 12
First, the program does not allow employees to feel like they are giving anonymous tips. If
they are just calling someone in the office who is the fraud liaison, then that person may
know the potential whistleblower, which would obviously discourage employees from
making calls. Many of them would fear retaliation from blowing the whistle. Second, if the
liaison is involved in the fraud, there would be no one to call. Third, putting a notice in the
break room is not sufficient. People must know about the program and be trained about how
it works. This lack of training would also create failure in the program. Finally, top
management must let employees know that the program is important to them and the
company by frequently referring to the program.
Case 13
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There are a number of techniques potential employers can use to screen to make sure they are
hiring honest employees. Some mentioned in the book are background checks, reference
checks, drug tests, criminal records checks, matching potential employees’ fingerprints
against fingerprint databases and credit checks. An extensive interview would also be helpful
in trying to assess the integrity of the potential employee.
Case 14
1. Hire honest people and provide fraud awareness training: Even in a small
business, you can establish hiring procedures that will result in a more honest
workforce. You may not be able to perform extensive background checks, but you
can at least check references and perform other simple and relatively inexpensive
screening processes. Even if you don’t have the resources to conduct lengthy fraud
awareness training seminars, discussions at the time of hiring or through the
distribution of materials can provide new employees with information about how to
handle fraud and the expected results of committing fraudulent behavior.
2. Create a positive work environment: Employees should be aware that either you or
another appointed employee is always willing to listen to them with respect to reports
of fraudulent activities. No one should be afraid to come forward. You might even
create a means of anonymous reporting. This does not necessarily need to include
expensive hotlines. It can be something as simple as a locked comment box. As well,
it is very important that you do not override controls. It may be true that you will
never rob your own company, but if your example is one of ignoring controls, you
open the door for your employees to do the same.
3. Have a wellunderstood and respected code of conduct or ethics: You should find
a way to inform all employees about what is expected of them with respect to
fraudulent activities. This will remove part of their ability to rationalize their actions.
4. Provide an employee assistance program: Fraud usually results (at least in part)
from pressures with which the employees are faced. You should attempt to monitor
and mitigate these pressures by providing an alternative means for employees to
receive assistance.
5. Create an expectation that dishonesty will be punished: You should always
prosecute employees who steal from the company. The publicity this causes shouldn’t
harm the company as much as the potential longterm effects that may ensue from not
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punishing dishonesty; most people realize that fraud affects all companies. In fact,
your responsible actions against fraud might instill confidence in others that your
company is addressing the problem in a healthy manner. Other employees will be less
likely to commit fraud if they know they will be punished severely if caught. In the
end, the savings will most certainly outweigh the costs.