APPENDIX 4: LIST OF SCHEDULE 1 OFFENCES 270
3.7 MODI OPERANDI OF FRAUDSTERS
According to the Merriam-Webster Dictionary (2014), modus operandi is defined as “a distinct pattern or method of operation that indicates or suggests the work of a single criminal in more than one crime”. Horgan (1979:59) holds that the term modus operandi is derived from Latin, meaning “operational method of procedure”. It is commonly referred to as method of operation or “M.O.”. The analysis of the modus operandi of a criminal is useful to forensic investigators because it enables them to identify the manner in which a specific criminal commits a specific type of crime on a number of occasions. The view of Campbell and DeNevi (2004:15) is that the repeated pattern according to which a crime is committed will assist in establishing the modus operandi of the perpetrator, especially if a serial criminal is responsible for the crimes.
Jackson and Bekerian (1997:2) assert that the types of motives and modi operandi employed by criminals, in committing crimes, are limited. In addition, they postulate that a crime and the criminal are not unique when viewed as a whole. On the one hand, the limited types of modi operandi employed by criminals may create a perception that detecting, investigating or preventing fraud will be an easy task. On the other hand, a fraudster who uses a specific method to commit a crime, cannot automatically be considered to be linked to a particular crime. In other words, profiling an offender based only on their motive and/or modus operandi, in order to identify a fraudster, for example, will not be an easy task. This can be largely attributed to the various ways in which criminals commit crimes. Fraud, for example, is perpetrated in various ways.
The ACFE (2014:71) defined the various terms used to describe the various types of fraud schemes falling under asset misappropriation. Table 3.1 below reflects the brief definitions of these terms:
Table 3.1: Definition of Terminology
TERM DEFINITION
Billing Employee submits invoices for goods and/or services that were never received, but payment is made.
The scheme also involves invoices for the purchase of personal items as well as inflated invoices.
Cash larceny Employee steals money received on behalf of the organisation after it is recorded in the financial records or banked.
Cash-on-hand
misappropriation Employee steals cash, for example, petty cash belonging to the organisation.
Cash register
disbursements Employee makes fraudulent entries in the records of the organisation in order to steal cash on hand, for example, by voiding a transaction on the cash register to steal the cash.
Cheque tampering Employee steals the cheque of his employer and fraudulently makes it out to himself/herself or to an accomplice, or intercepts a cheque from a debtor and deposits it into the fraudster’s bank account.
Expense
disbursements Employee submits claims for fraudulent expenses, for example, non-existent meals or inflated travel expenses.
Non-cash
misappropriations Employee steals or misuses non-cash assets, for example, inventory from the storeroom or confidential business information.
Payroll Employee claims for overtime that was not worked or adds non-existent (ghost) employees onto the payroll.
Skimming Employee steals money received on behalf of the organisation before it is recorded in the financial records or banked.
Source: ACFE (2014:71)
Asset misappropriation is a predominant category of fraud that is occurring globally. The nine sub-categories of fraud schemes listed above provide a portrait of the modi operandi employed by fraudsters in perpetrating these sorts of fraudulent schemes. Once there is an understanding as to how fraud is committed, this forms a basis for designing and implementing adequate and appropriate prevention and detection measures.
To augment the steps taken to combat fraud within an organisation, the use of red flags in conjunction with the analysis of modi operandi and motives should be considered. The term
“red flag” is commonly referred to by individuals within the forensic auditing, accounting and investigation fields. A red flag is defined in the Merriam-Webster Dictionary (2015) as “a warning sign which indicates that there is a problem that should be noticed or dealt with”.
Results of the ACFE biennial survey (2014:59) revealed that fraudsters displayed certain behavioural characteristics before a fraud was detected. Not all behavioural red flags mean that an employee is involved in committing fraud. Red flags provide the organisation with an early warning system, which indicates that something may be amiss. The ACFE (2014:59) surveyed and reported on 17 types of red flags. The types of red flags that the perpetrators of employee fraud displayed, were ranked from highest to lowest as follows:
Living beyond their means;
Experiencing financial difficulties;
Having unusually close association with supplier or customer;
Control issues and reluctance to share duties;
“Wheeler-Dealer” attitude;
Divorce/family problems;
Irritability, suspiciousness or defensiveness;
Addiction problems;
Complained about inadequate pay;
Past employment-related problems;
Refusal to take vacation leave;
Excessive pressure from within the organisation;
Social isolation;
Complained about lack of authority;
Excessive family/peer pressure for success;
Instability in life circumstances, and
Past legal problems.
The ACFE (2014:59) found that one red flag was present during 92% of the cases surveyed, while a combination of at least two or more red flags were present in 64% of the cases. An analysis of the results indicates the top six types of red flags which constitute the majority, namely:
Living beyond their means – 44%;
Experiencing financial difficulties – 33% ;
Having unusually close association with supplier or customer – 22%;
Control issues and reluctance to share duties – 21%;
“Wheeler-Dealer” attitude – 18%, and
Divorce/family problems – 17%.
According to the ACFE (2014:59), these six red flags were also found to be the most common types of red flags during the previous three biennial studies that were carried out globally.
Coenen (2008:127) suggests that organisations should set out a list of red flags which could be used to trigger an investigation, once a warning sign (red flag) or a combination of red flags are identified. Knowledge about these modi operandi will be beneficial in addressing employee fraud and prevention strategies at universities in KwaZulu-Natal.