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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.

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fraud theories

Fraud Theories

Dr. Raymond S. Kulzick, CPA, CFE

St. Thomas University

Miami, Florida

Copyright 2004 R. S. Kulzick

fraud theories2
Fraud Theories
  • Sutherland – White Collar Crime
  • Cressey – Fraud Triangle
  • Albrecht – Fraud Scale
  • Hollinger - Clark Study
edwin h sutherland
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
cressey s offender types
Cressey’s Offender Types
  • 1. Independent businessmen
    • “Borrowing”
    • Funds really theirs
  • 2. Long-term violators
    • “Borrowing”
    • Protect family
    • Company cheating them
    • Company generally dishonest
cressey s offender types5
Cressey’s Offender Types
  • 3. Absconders
    • Take the money and run
    • Usually unmarried, loners
    • Blame “outside influences” or “personal defects
the fraud triangle
The Fraud Triangle

PRESSURE

RATIONALIZATION

OPPORTUNITY

nonsharable problems
Nonsharable Problems
  • Violation of ascribed obligations
  • Personal failures
  • Business reversals
  • Physical isolation
  • Status gaining
  • Employer-employee relations
pressure
Pressure
  • Financial
  • Vice
  • Work-related
  • Other
opportunity
Opportunity
  • Controls
    • Environment
    • Accounting
    • Procedures
  • Performance quality
  • Discipline perpetrators
  • Access to information
  • Ignorance, apathy, incapacity
  • Audit trail
rationalization
Rationalization
  • They owe me
  • Borrowing
  • Nobody will get hurt
  • I deserve more
  • It’s for a good purpose
w steve albrecht
W. Steve Albrecht

Nine motivators of fraud

  • Living beyond means
  • Overwhelming desire for personal gain
  • High personal debt
  • Close association with customers
  • Pay not commensurate with job
w steve albrecht12
W. Steve Albrecht

Nine motivators of fraud

  • Wheeler-dealer
  • Strong challenge to beat system
  • Excessive gambling
  • Family/peer pressure
the fraud scale
The Fraud Scale
  • Situational pressures
    • Immediate problems with environment
    • Usually debts/losses
  • Perceived opportunities
    • Poor controls
  • Personal integrity
    • Individual code of behavior
hollinger clark study
Hollinger-Clark Study
  • Hollinger-Clark study (1983)
  • Surveyed 10,000 workers
  • Theft caused by job dissatisfaction
  • True costs vastly understated
employee deviance
Employee Deviance
  • Two categories:
    • Acts against property
    • Production violations (goldbricking)
  • Strong relationship: theft and concern over financial situation
age and theft
Age and Theft
  • Direct correlation
  • Younger employees less committed
  • But, higher position = bigger theft
  • Opportunity is only a secondary factor
job satisfaction and deviance
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
Organizational Controls
  • Some impact, but limited
  • Hollinger studied five aspects:
    • Company policy
    • Selection of personnel
    • Inventory control
    • Security
    • Punishment
hollinger s conclusions
Hollinger’s 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
hollinger s conclusions21
Hollinger’s Conclusions

Four key aspects of policy development

  • Understand theft behavior
  • Spread positive info on company policies
  • Enforce sanctions
  • Publicize sanctions
overall conclusion 1
Overall Conclusion 1
  • Perpetrators feel justified
  • Must counter this
    • Morally
    • Legally
    • Consequences
overall conclusion 2
Overall Conclusion 2
  • Concept of wages-in-kind
    • Hire the right people
    • Treat them well
    • Have reasonable expectations
overall conclusion 3
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