mentions that “other trends in research relate
to employee fraud and control mechanisms”.
EMPLOYEE FRAUD: EXPERT
VIEWS
Dishonesty in the workplace can cause many
problems. Employee fraud is one type of
dishonesty that needs to be addressed in all
organisations. It is a hidden behaviour that
often goes undetected and can cost
organisations hugely. Human Potential
Accounting has spoken to a number of
experts, in both academia and the business
world, on the topic of employee fraud.
Themes and trends, the application of
research to the real world, the current
economic climate, practical strategies and
future focus were discussed. The expert views
and opinions are presented throughout this
article.
Main themes or trends
In research, employee fraud comes under the
broad heading of employee dishonesty.
Employee fraud is a sensitive issue, especially
to the company involved. This means that
research into this area can be problematic.
Even so, several themes in the research were
identified. “There are two main streams of
research. One particularly looks at
determinants of employee fraud or
misbehaviour from a psychological or
sociological perspective. The second group of
studies look into the control factors”,
(Zauwiyah Ahmad, Lecturer/Head of
Accounting Unit at Multimedia University). In
addition Ahmad states that “due to the
sensitive nature of the enquiry and the
difficulty in gauging control systems, there is a
wide gap in the existing research”. Mariati
Norhashim (Lecturer at Multimedia University)
© Human Potential Accounting Ltd 2009. All rights reserved.
David Porter (Head of Security and Risk at
Detica), states the main themes and trends to
be, “collusive interaction with external
organised criminals” and motivation for staff
fraudsters. “Sociopathic vs. Psychopathic”
fraudsters and research around “enlisting the
support of the honest/semi-honest majority
of employees” were also considered key
themes by Porter. Jim Ratley (President of the
Association of Certified Fraud Examiners)
mentions that “the evolution of technology
has brought about new challenges for
organisations in tackling the problem of
employee fraud. While the basic schemes
used by employees remain generally the same
over time, technological advances have made
concealing these schemes easier and,
consequently, detecting and investigating
them more difficult”. Although technology
brings with it many improvements it is evident
that organisations need to consider the
impact of new technology on insider fraud.
“The other trend we’re seeing is increased
emphasis on, and attention paid to, the risk of
employee fraud”; Ratley adds that “the past
year has seen a `perfect storm‘ for employee
fraud, in that all three factors that form the
fraud triangle – pressure, opportunity and
rationalisation – have been greatly increased
for many employees”.
Several themes and trends are mentioned,
the most prevalent being determinants of
employee fraud and control mechanisms.
Organised criminals, motivation and
technology are also mentioned.
Linking employee fraud research
to the real world
It is important that research can be applied in
organisations, thus bridging the gap between
academia and the business world. Research
Page 1
helps us to gain knowledge and understanding
which in turn can be very useful for
organisations. “The research could help to
identify the type of fraud more prevalent
among employees and then determine ways
by which the fraud can be prevented. I believe
the local culture is also relevant to the issue of
fraud” (Ahmad). Here Ahmad provides an
example of how research can directly benefit
an organisation. Research can also help with
“pinpointing areas of weakness and putting in
place mechanisms and policies to detect and
prevent fraud from happening” (Norhashim).
Porter identifies that research is helping with
the “more rapid detection of embryonic fraud
rings involving insiders and outsiders”. Fraud
research has a practical application that can
benefit businesses enormously. This
connection needs to be further exposed.
Employee fraud factors or issues
currently ignored or limited in
the research
Despite the practical application of employee
fraud research there are some areas that
need further attention. Ahmad identifies that
the actual impact of fraud control systems on
employee fraud is limited in the research. “A
control system is good as long as its costs do
not exceed the benefits”. It may be useful for
the cost of employee fraud to be determined
and then suggestions to be “forwarded on the
extent of control necessary for its prevention”
(Ahmad). Norhashim suggests that “a cross
over between human resource management
and accounting would be interesting. There is
still a strong tradition of economic thought,
when sociological and psychological
approaches could bring more realism to
research in internal control”.
Porter believes that there is only limited
research into “economic motivation,
externalities and incentives” and that
research on the profiles of fraudsters has also
© Human Potential Accounting Ltd 2009. All rights reserved.
been limited. We need “something other than
‘white middle-aged professional male’ which
is now clichéd and unhelpful”. Bonita Peterson
Kramer (Professor of Accounting at Montana
State University) provides some questions
which currently have limited focus; “how do
companies deal with instances of fraud? Do
they prosecute? If not, why not? If they simply
let the employee go, does the employee
typically commit fraud again?”
So despite the research so far conducted into
employee fraud and its application to
business, there are still some areas which
need to be investigated.
Straightforward advice about
preventing and detecting
employee fraud
Employee fraud can have serious
consequences for everyone involved. In this
section the experts provide some advice on
how to prevent and detect employee fraud.
“Companies should carefully review their
internal control system. Fraud can be
prevented if the company has a good internal
control system” (Ahmad). Porter advises that
organisations should “exploit tools for smart
analysis of data” and set up “audit trails from
internal systems and your general transaction
data”. Porter also emphasises that “social
network analysis is an extremely powerful
approach” along with “understanding the
profile of an industrial psychopath”. In
addition “smart fraudsters don’t have criminal
records, just stupid or greedy ones” (Porter).
Organisations need to “understand that
insider fraudsters range from post room to
board room” (Porter).
Kramer believes that “the premiere anti-fraud
organisation in the world is the Association of
Certified Fraud Examiners (ACFE)”.
“Companies should seriously consider
attending any of their numerous training
Page 2
sessions and/or obtaining any of their fraud-
related educational materials”. “Upon doing
so, companies will learn that the best way to
prevent employee fraud is to increase the
perception of detection. If employees believe
they will be caught if they commit fraud, they
are far less likely to commit the fraud in the
first place” (Kramer). It is important that
businesses “remember that no organisation is
immune to fraud; it is a problem faced by all
companies in every industry”. “A company
should seek the help of professionals,
whether internal staff members or external
consultants, who are specifically trained in
fraud prevention and detection and who can
help tailor anti-fraud measures to the
organisation’s specific circumstances”
(Ratley).
There is some advice here that organisations
can implement. The key pieces of advice
centre on tightening up internal controls and
the use of expert fraud investigators.
The effect of the current
economic climate on employee
fraud
With the current recession a lot of people are
feeling the pinch financially and many have
been made redundant. This could be linked to
instances of employee fraud – but how is the
current economic climate really affecting
employee fraud? “There are two possibilities.
Employees who are having financial problems
or stresses due to the current economic
situation may opt for the easy way out, by
stealing from the employing company.
Presented with the pressure, opportunity and
the right rationalisation, an employee could
be enticed to commit fraud. But uncertain
economic conditions may also increase the
employees’ awareness regarding the need to
perform their best (by being honest and
hardworking instead of cutting corners) so
that they will not lose their jobs” (Ahmad).
© Human Potential Accounting Ltd 2009. All rights reserved.
In line with Ahmad, Kramer also emphasises
increased financial pressures. “The current
economic climate has increased the financial
pressure on potential fraud perpetrators.
Pressure is one of the three elements of the
fraud triangle – the other two are perceived
opportunity to commit the fraud (and remain
undetected) and rationalisation (the ability to
justify the action in one’s own mind as being
acceptable, as not being a crime). Removing
any one of the three elements can greatly
reduce the risk of fraud. Conversely, if the
financial pressure has increased and
employees believe they have the opportunity
to commit the fraud (without detection) and
can rationalise the act, the risk of fraud
occurring has increased” (Kramer).
Ratley explains that the ACFE’s “research
indicates that the level of employee fraud has
increased since the beginning of the recent
economic turmoil, and is expected to continue
increasing in the coming months. Earlier this
year, the ACFE published a report
(Occupational Fraud: A Study of the Impact of
an Economic Recession) which revealed the
effects of the current economic climate as
experienced by more than 500 Certified Fraud
Examiners. The survey respondents
overwhelmingly stated that they believe there
is more fraud during times of economic
distress”. “Individuals are facing growing, and
often severe, financial needs. Due to salary
cuts and layoffs, employee loyalty has
declined in many companies, resulting in a
greater ability to rationalise misconduct.
Downsizing has also increased the
opportunity for potential employee fraud due
to smaller staff size, overworked employees,
less segregation of duties, less oversight and
fewer internal controls to prevent fraud.
Many companies are responding by
maintaining or increasing their budgets for
anti-fraud measures, even while cutting
spending in other areas” (Ratley).
Page 3
In slight contrast with Ratley, Porter describes
this link as a “red herring” explaining that “we
will see increased levels of discovery which will
force fraudsters to raise their game”.
The fraud triangle was mentioned several
times in this section. When all three
components of the fraud triangle are present
the likelihood that fraud will occur is higher
than if one or more of the components is
missing. This is a useful framework for
organisations to view fraud. There is also a
debate around whether employee fraud
actually increases during tough economic
times or is just seen to increase due to more
discoveries and scrutinising of company
finances.
Strategies for preventing and
detecting employee fraud
Employee fraud is a hidden behaviour – which
makes detection of this costly behaviour very
difficult. However, there are strategies that
organisations can implement to prevent and
detect fraud. “Companies have to implement
good internal control systems and at the same
time ensure there is no management
override. Management override can weaken
the internal control system. Having an internal
audit and a good, independent audit
committee also helps” (Ahmad). Porter
outlines some useful strategies; “overhaul
today’s obsolete vetting processes and detect
fraudsters as early as possible once they get
through”. Porter further adds that “a
prevention-centric approach is flawed” and
that organisations should “pay attention to
‘softer’, classic cultural and psychological
factors while embracing state-of-the-art
analytic technology”.
The focus on detecting fraud at an early stage
is key and is echoed by Kramer. “All strategies
centre around the perception of detection”.
Organisations need to “make the employee
believe they will be caught if they commit
© Human Potential Accounting Ltd 2009. All rights reserved.
fraud. And if an employee is caught, action
must be taken. One way to increase the
perception of detection is to use an
anonymous hotline for employees to report
their suspicions of fraud. Often, other
employees are the first to know something is
wrong, but have no means of reporting their
suspicions”. “Educating employees and
managers about the red flags of fraud can be
helpful. People need to understand what to
look for in order to be able to report
suspicions. And again, this education can help
to create the perception of detection”
(Kramer). Ratley agrees with the strategies
mentioned by Kramer. “The best way to
prevent employees from engaging in fraud is
to increase the perception that dishonest acts
will be detected. Some proactive steps
organisations can take to this end include
implementing an anonymous employee
reporting mechanism (such as a hotline),
educating all managers and employees about
what constitutes fraud and how to report any
suspicious activity, conducting surprise audits
and implementing job rotation and
mandatory vacation policies”. Jane Pound
(Director at Signal Consulting) adds that
“organisations need to place a greater
emphasis on managers and employees in
teams taking ownership for risk management
and ensuring the adequacy of their internal
controls (which can result in greater
prevention and possibly higher degrees of
employee engagement too)”.
These strategies can all be implemented by
organisations fairly simply and will make a
huge difference in the prevention and
detection of fraud. But how effective are
these strategies? Ratley points out that the
ACFE’s “research consistently shows that tips
are the most common way that employee
fraud is detected, catching a greater
percentage of frauds than internal controls,
internal audits and external audits.
Consistently, hotlines are an important part of
any effective fraud prevention and detection
Page 4
program”. “Fraud losses in organisations that
enacted surprise audits, job rotation and
mandatory vacation policies, hotlines and
employee and manager fraud education
programs were less than half as large as the
fraud losses at organisations lacking such anti-
fraud measures” (Ratley). This clearly
demonstrates the effectiveness of such
strategies.
Ratley also expands on some key points that
organisations should cover when
implementing employee fraud strategies.
“Each organisation is unique; consequently,
there is no one-size-fits-all fraud prevention
program. Instead, an organisation should
discuss its specific needs with a Certified
Fraud Examiner who has the expertise to
evaluate the particular fraud risks faced by
the organisation, the potential impact of
those risks, the appropriate measures to take
to address those risks and the resources
needed to do so”.
This section has identified the most effective
strategies in detecting and preventing fraud.
Organisations who are not already doing so
should carefully consider the benefits of
implementing some of these strategies and/or
seeking professional advice on employee
fraud risks in their company.
Organisations who are
particularly strong in addressing
employee fraud issues
Due to the sensitive nature of employee fraud
organisations tend not to publicise actions in
this area. Many are unwilling to make their
efforts and downfalls public if it can be
avoided. Ahmad explains that “usually
multinational companies are better in this
matter”. Porter adds that Detica, as a leading
solutions integrator, helps its clients tackle
the issue of employee and other forms of
fraud. In addition, Porter describes that there
is some “very effective work going on in parts
© Human Potential Accounting Ltd 2009. All rights reserved.
of the public sector” and that the “leading
industries in the private sector are the Tier 1
banks and mobile/fixed-line telcos”. But
although there are some organisations
dealing practically with employee fraud, the
amount seems limited and organisations
could be doing more to fight this especially
damaging form of employee dishonesty.
Where should we focus our
attentions to minimise the effects
of employee fraud
As employee fraud can cost organisations
hugely they need to start integrating
prevention and detection strategies into daily
business processes. But to further minimise
the effects of employee fraud where should
our attention be focused? “Employee fraud
can vary from grand-scale embezzlement to
small theft of company assets. Different types
of theft should be dealt with differently. I
believe there are employees who take
company assets thinking that it is not wrong
to do so or it is just the norm. It is important
to know whether employee fraud results from
unawareness, greed, pressure or the
opportunity presented” (Ahmad). Kramer
believes that education is key to moving
organisations forward in this area.
“Employees and management must be
educated about what motivates people to
commit fraud, various fraud schemes and how
they work, the red flags of fraud and internal
controls that can help to prevent and detect
fraud” (Kramer).
“Most companies realise the importance of
strong internal controls to help reduce the
opportunity for employee fraud. However,
organisations also need to focus their anti-
fraud efforts on the other two legs of the
fraud triangle: the pressures faced by
employees and the ability to rationalise
dishonest acts. Especially in the current
economic climate, measures should be taken
to help ease the impact of financial pressures
Page 5
felt by employees. Employee assistance
programmes and financial counselling referral
programmes are good examples of ways
companies can assist employees who are
dealing with personal economic challenges.
Organisations must also take care to foster
goodwill among employees, especially if there
have been staff cutbacks or salary reductions,
to ensure they are not inadvertently providing
individuals with a means to justify committing
fraud” (Ratley).
This section has included some directions for
future employee fraud research. Education
and management awareness of fraud in their
organisation are seen as key.
Conclusion
This article has presented some of the views
and opinions given to Human Potential
Accounting during interviews with employee
fraud experts. We hope the article is both
interesting and informative. It has given an
© Human Potential Accounting Ltd 2009. All rights reserved.
overview of current employee fraud research,
with suggestions for improvements and
recommendations for future direction.
Practical strategies for the prevention and
detection of employee fraud and the effects
of the current economic climate have also
been discussed. As a hidden activity and a
sensitive area for organisations, employee
fraud needs to be more openly addressed.
Businesses should consider implementing
some of the strategies mentioned in this
article or talking to an employee fraud
professional. Organisations need to actively
focus on detecting employee fraud in the
early stages before any serious losses occur.
Author: Ruth Hannant BSc MSc
Page 6
About the experts
Human Potential Accounting would like to thank all of the experts quoted in this article. A brief
insight into each of them follows.
Zauwiyah Ahmad
Zauwiyah Ahmad is a Lecturer and Head of
the Accounting Unit in the Faculty of Business
and Law, Multimedia University, Malaysia. In
addition she is currently pursuing her PhD.
Her research interests include behavioural
accounting research.
Bonita Peterson Kramer
Bonita Peterson Kramer is a Professor of
Accounting in the College of Business at
Montana State University. Her research
focuses on accounting education, typically
with an emphasis on fraud.
© Human Potential Accounting Ltd 2009. All rights reserved.
She has published articles in several
accounting, academic and practitioner
journals. In 2009 Kramer co-authored the
book ‘Financial Statements DeMystified’ and
also co-authored a chapter on the demise of
Arthur Andersen & Co. in ‘Handbook of Fraud,
Scams and Swindles: Failures of Ethics in
Leadership’.
Mariati Norhashim
Mariati Binti Norhashim is a lecturer at the
Faculty of Management, Multimedia
University, Malaysia. She is currently pursuing
her PhD in Family Economics and
Management at the Faculty of Human
Ecology. She holds Master’s and Bachelor’s
(Hons) degrees in Accounting.
Her interests include entrepreneurship and
personal finance education as well as financial
management and reporting. She has taught
both financial accounting and reporting,
management reporting and accounting
theory. Among her publications are articles
related to internal control, entrepreneurship
and cluster development. She is attached to
and has written cases for the Malaysian
Institute of Accountants case-writing group.
Page 7
David Porter Jane Pound

David Porter is Head of Security and Risk
at Detica. Detica is a business and technology
consultancy specialising in helping clients
collect, manage and exploit information to
reveal actionable intelligence. As a Certified
Fraud Examiner he is a leading subject matter
expert in the area of operational risk
management and technology, consulting to
clients in the government, defence and
financial services sectors. He is Detica’s chief
media spokesman and has extensive
experience as an international analyst,
speaker, writer and commentator on fraud
and security issues.
Jane Pound is Director at Signal Consulting.
She is a duel qualified HR and Internal Audit
professional with over 15 years management
experience within the Public Sector. Jane’s
areas of expertise include internal audit, risk
management, reward, business planning,
change and project management, HR internal
consultation and internal communications.
Signal Consulting specialise in Internal Audit,
Risk Management and Organisational
Development/HR.

Jim Ratley

Jim Ratley is President of the Association of Certified Fraud Examiners (ACFE). His previous
employment saw him employed by the Dallas Police Department as a Police Officer. He was a
member of numerous department task forces which concentrated on major fraud cases. In 2005, he
was awarded the Association of Certified Fraud Examiners’ highest award, the Cressey Award, and is
a member of the Board of Advisors for the Institute for Bank Director Education.

© Human Potential Accounting Ltd 2009. All rights reserved. Page 8