APPENDIX 4: LIST OF SCHEDULE 1 OFFENCES 270
2.2 EMPLOYEE FRAUD
2.2.10 Fraud during the 20 th Century
A different approach to that described above was subsequently required to explain criminal behaviour in a more acceptable manner. Sutherland (1940:2) explained that white collar crimes are found in every different type of occupation. The financial losses arising out of white collar crime are substantial, including the damage to social relations as it violates the trust between employer and employee. Sutherland (1940:10) asserts that white collar criminality is learned either directly or indirectly from the behaviour of other criminals. Such individuals, who learn how to commit crime, are isolated from constant exposure to the law-abiding conduct of others. In order to explain this theory, it could be associated with the saying “birds of a feather flock together”. Slezak (2013:21) equates this theory to the warning parents give to their growing children not to associate with friends who are trouble-makers. The intention of the parent is to dissuade the child from also getting into trouble, due to their association with trouble-makers. Sutherland’s theory was called “differential association”, advocating that criminal behaviour is learned from one’s exposure to people with whom they associate. The suggestion is that associating with criminals would result in honest people turning into criminals themselves.
Cressey (1973:742), who was Sutherland’s student at the time, undertook research to understand why employees surrendered to temptation to commit fraud against their employers.
He called them “trust violators” because they violated the trust of their employers. This section has particular relevance to employee fraud and prevention strategies at universities in KwaZulu-Natal. A total of 250 incarcerated “trust violators” were interviewed as part of the study. Arising from the study, Cressey (1973:741) found that there were three factors that were present which gave rise to the violation of trust and which resulted in fraud. They were: a non-
shareable financial problem (pressure), an opportunity to commit the crime and the rationalisation by the “trust violator”. In recent years, these factors became known as the fraud triangle (Wells, 2013:8), incorporating pressure, opportunity and rationalisation. According to Comer (1977:9), organisations have the capacity to influence the motivation of an employee who is intent on committing fraud. Comer (1977:13) asserts that a potential fraudster will only exploit an opportunity to commit fraud if he/she has the perception that the likelihood of being detected is very low.
2.2.10.1 Surveys Conducted during the 20th Century
According to Wells (2013:6), it was Edwin Sutherland, a criminologist, who researched fraud committed by business executives against shareholders and the public. It was this pioneering work, according to Wells (2013:6), which resulted in Sutherland coining the phrase “white collar crime” in the year 1939. According to Kranacher (2010:60), white collar crime is being used as a nomenclature when referring to economic crimes, including employee fraud.
The Association of Certified Fraud Examiners (ACFE) conducted a biennial survey during 1996, where the objective was to establish the status of fraud and white collar crime in the United States of America (USA). The ACFE Report to the Nation (1996:3) found that employees who committed fraud against their employers ranged from junior employees and managers through to executives of various organisations. The survey found that the most common category of violations were asset misappropriation, corruption, false statements, false overtime, theft, use of company resources for personal benefit, payroll and sick leave abuses (ACFE, 1996:3). The survey also found that financial losses arising out of fraud committed by managers and executives were sixteen times higher than fraud committed by junior level employees. The report concluded by recommending the following:
Consult a Certified Fraud Examiner (CFE);
Management should set the tone at the top;
Provide a code of ethics for employees;
Check the references of potential employees;
Scrutinise the bank statements of the organisation;
Institute a fraud hotline for receiving anonymous tip offs, and
Motivate staff by providing a good work environment.
In this research and explained later, it can be inferred that preventing unethical behaviour of employees at universities in KwaZulu-Natal, compels the inclusion of an ethical component as part of regular training sessions for employees.
The biennial ACFE Report to the Nation (2004) in the USA, inter alia, found that:
Organisations suffered losses in excess of $761 million (R9 132 billion) due to employee fraud;
Employee frauds were mostly detected through a tip off rather than through internal or external audits or internal controls;
The provision of anonymous fraud hotlines assist in fraud reduction, and should also be made accessible to third parties such as suppliers;
There is a need for robust internal controls;
Preventing fraud is cost effective, and
On average, the victim organisations recovered only 20% of their loss.
The above information can be extrapolated relevant to employee fraud and prevention strategies at universities in KwaZulu-Natal. A common recommendation in both these reports by the ACFE, in 1996 and 2004, were the implementation of an anonymous fraud hotline as a means of detecting fraud.
2.2.10.2 Current Nature of Employee Fraud
According to Johnson and Rudesill (2001:57), employee fraud involves a three-step process:
the fraudulent act, the conversion of the act and the concealment thereof. The unlawful act is the crime of fraud. The conversion is the misrepresentation that is perpetrated. The fraudulent act is concealed so that the truth is not exposed. They assert that the use of computer technology has enhanced business opportunities. In so doing, computers have exposed organisations to increased risk of fraud. Computers have thus created more opportunities for fraud to be perpetrated (Johnson and Rudesill, 2001:58). As enablers for organisations to successfully and sustainably operate, computers have brought about their own challenges to organisations in the form of fraud risks. According to Johnson and Rudesill (2001:58), computers provide more opportunities for employees to use as a tool to commit fraud.
Albrecht et al. (2006:10) classify fraud into two categories. Firstly, there is fraud committed by employees against their employers. Secondly, there is fraud that is committed on behalf of
one’s employer. In this study, the focus is on fraud committed against the organisation by employees. For purposes of clarity, fraud committed by employees on behalf of their employers can be explained as falsification of the financial results of an organisation. The motive here may be the enhanced payment of bonuses that employees would receive to the prejudice of shareholders due to inaccurate listing of share or stock prices.
Occupational (employee) fraud is the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organisation’s resources or assets (Wells, 2013:2). This definition encompasses all levels of employees, from executives to the lowest ranking employees. According to Wells (2013:2), the employee carries out the fraudulent act secretly. This act is carried out contrary to her fiduciary duties. The result is that the employee unduly derives direct or indirect financial benefit from the act. The victim is the organisation that suffers a loss due to the fraud. This view is echoed in the ACFE Report to the Nation (1996:3).
The negative impact of employee fraud on organisations, which prompted this study, is of grave concern. From a preventative perspective, more effort is required in averting fraud from taking place rather than reacting to fraud that has already occurred and handling the losses suffered.
2.2.10.3 Fraud Prevention
The Greek Empire, according to Bakewell (2007:126), implemented measures to prevent fraud during the year 425. A body of citizens was constituted to prevent dishonest practices such as fraud and the trade of goods that were not in a suitable condition. The measures were implemented due to the emergence of fraud related to trading in counterfeit and poor quality gold and silver coins, as well as other precious metals in Athens.
2.2.10.4 Origins of Fraud Prevention
During the eighteenth century, Blackstone (1753:381) also made reference to the prevention of fraud. In this instance, reference was made to a situation where the husband bequeaths to his wife a part of land belonging to his father, who is still alive. The law required that this transaction be made “in facie ecclesiæ, et ad ostium ecclesiæ; non enim valent facta in lecto mortali, nec in camera, aut alibi ubi clandestina fuere conjugia”, meaning it had to be made
“in the face of the assembly, and at the church door; for it is not worth to take place in the bed of death, neither have entered into the camera, or in other places where clandestine marriages were”. The purpose of this requirement in law at the time was to prevent fraud involving the bequeathing of land to a beneficiary. Transparency was the key element in these situations in order to prevent fraud.
According to Lee (1971:151), the segregation of duties, as a control measure, was in existence during 3600 to 3200 B.C. The managers at the time sought to separate accounting duties, for example. Lee (1971:153) holds that another form of control implemented by the Greeks and Romans during the period 500 B.C. was the widespread use of auditors (arbiters) to scrutinise the accounts of public officials when their terms of office culminated. According to Lee (1971:154), the period 1100 to 1200 A.D. saw the introduction of a “tally stick” as a control measure, which served the purpose of a receipt. Notches were cut out on the wooden tally stick to indicate how much money was received or owed. The tally stick was split into two halves;
one half was retained by each of the two parties. One of the purposes of this control was to prevent fraud and error. The control measure used in England during the period 1100 to 1135 A.D., was the “Pipe Roll” (Lee, 1971:154). The Pipe Roll was used to record the revenues that were due to the monarchy, the revenues actually collected and the expenditure incurred in collecting the revenues.
2.2.10.5 Fraud Prevention Strategies
According to Irvine (2001:344), the principles of modern day common law in England were tweaked to incorporate fraud prevention as a consideration in the overall business strategy. For example, if it was found that shareholders had created a company with the intention to commit fraud, they would be held liable in their personal capacities for the debts incurred by the company. The risk of being held personally liable for company debts due to fraud served as a measure to prevent fraud from occurring in the first place.
Wells (2013:7), in considering Sutherland’s (1940:10) theory of differential association, asserts that although dishonest employees will negatively influence honest employees, the converse is also true. Honest employees will influence their dishonest colleagues against committing fraud.
This theory should be considered when providing regular fraud awareness training to employees as a means of fraud prevention. It suggests that honest employees could justifiably
be regarded as the eyes and ears of an organisation. They should be appropriately trained to identify fraud or their suspicion of fraud in the workplace and encouraged to report it to the relevant authorities. Such training should be provided to all employees and not only to employees who are perceived to be honest.
The prevention of fraud is essential to the viability of an organisation. Fraud results in financial loss to organisations. This has a direct impact on the bottom line of an organisation. Comer (1977:305) holds that an organisation cannot remove all opportunities that enable fraud to be committed because internal controls require funds for implementation. Coenen (2008:148) concurs that designing, implementing and maintaining adequate and effective internal controls can be costly to an organisation. A weakness in the internal control environment does not necessarily provide an automatic opportunity for fraud to be perpetrated. In order to prevent fraud, organisations should implement adequate measures that prevent or detect fraud. If these counter-measures are communicated to all employees, it will convey a message that employees who commit fraud will be caught out. According to Comer (1977:306), the risk that the fraud will be detected has a deterrent effect on would-be fraudsters. The risk of being detected poses a risk to criminals but it does not inhibit law-abiding employees from doing their job (Comer, 1977:306).
Krummeck (2000:269) explains that law-abiding employees are expected to report fraud to the relevant authorities within the organisation because it is the correct thing to do. Fraud prevention, according to Krummeck (2000:269), is not the responsibility of any single department but rather that of all employees in the organisation. This section is of particular relevance to employee fraud and prevention strategies at universities in KwaZulu-Natal.