Occupational fraud is the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets. The gains from the fraud can be direct (receipt of money or property) or indirect (reward or promotions, bonuses, power or influence). Occupational fraud and abuse includes a variety of conduct by employees, managers, and principals of organizations. The fraudulent act may range from pilferage to sophisticated investment swindles. Common violations include asset misappropriation, corruption, false statements, false overtime, petty theft and pilferage, use of company property for personal benefit, and payroll and sicktime abuses.
Fraud and abuse costs employers an average of $9 per a day per employee. Fraud and abuse costs U.S. organizations more than $400 billion annually. The average organization loses about 6% of its total annual revenue to fraud and abuse committed by its own employees.
The following report identifies some general characteristics that may be found in a profile of those who commit occupational fraud.
MALE
The typical perpetrator is a college-educated white male. Men commit three-fourths of fraud and abuse cases. Median losses caused by men are nearly four times those caused by women. The median loss per incident of fraud caused by males is approximately $185,000; by females, approximately $48,000.
An example of a male perpetrator is Fife Symington. In 1997, Arizona governor, Fife Symington, was found guilty of fraud. Symington, a two-term governor, faced 21 counts of bank fraud, attempted extortion, and perjury. Symington’s fraud started in the 1980’s when he easily obtained loans and lines of credit gave rise to numerous projects that later failed along with the real estate market. Symington built about two dozen buildings and shopping centers in the 1980s and early 1990s. When he first ran for office in 1990, Symington promised voters to run Arizona like his "successful development business". During his second term, his "sorry" financial state became public knowledge. Less than a year into his second term, Symington was bankrupt. Symington resorted to fraud to cover up his failed business dealings and to maintain his reputation for success, which undoubtedly influenced his election to governor.
INTELLIGENT
Fraudsters may feel challenged by "secure " systems. The individual may be bored by the routineness of their job.
The case of Stanley Mark Rifkin exhibits this characteristic. Rifkin stole $10.2 million from California’s Security National Bank in less than an hour. Rifkin was a computer programmer who was creating a back-up system for Security National’s wire room- the bank’s communication center from where between two to four billion dollars are transferred a day. Rifkin had to learn the system, and as he did, he began to consider robbing the bank. On October 25, 1978, he stole an employee access code from the wall of the wire room, walked to a nearby telephone, and transferred the $10.2 million to a New York bank and then to Switzerland.
EGOTISTICAL
The perpetrator may be scornful of obvious control flaws. The employee feels that beating the organization is a challenge and not a matter of economic gain alone. Also, the individual may feel tired of "dumb" managers.
INQUISITIVE
The employee is overly curious about the job or organization. The employee may be tempted by the discovery of something new, such as a computer vulnerability.
RISK TAKER
The individual is willing to bend the rules and take chances. The employee fails to consider the consequences of being caught.
Toshihide Iguchi, a bond trader at Japan’s Daiwa Bank, was charged in 1995 with doctoring records to hide over $1 billion in losses. Iguchi lost the money through unauthorized trades over 11 years at Daiwa’s New York branch. Iguchi had single-handedly concealed losses from bank superiors. Iguchi was in charge of the backroom operations that monitor trade, meaning he was policing himself. In addition to losing over $1 billion through unauthorized trades, Iguchi made unauthorized sales of the bank’s government securities to cover up his losses. Iguchi entered into the unauthorized trades in hopes of profiting on the trades without the bank’s knowledge.
RULE BREAKER
The employee takes short cuts. He/She self-justifies infractions of laws, rules, etc. Employee may think "everybody else does it, why not me?".
Gurmeet Singh Dhinsa , the owner of New York City Gas Company, defrauded customers and the government. Dhinsa defrauded customers with pumps electronically rigged to overcharge. He evaded state taxes by shipping bulk gas from out of state, where it is taxed less. In addition, Dhinsa ordered several killings in an attempt to cover up his fraudulent activity. Dhinsa had no regard for the illegality of his actions.
HARD WORKER
The employee is the first to arrive in the morning and the last to leave at night. The employee takes few vacations or is reluctant to be away from the office.
UNDER STRESS
The employee is suffering from a personal crisis, such as a financial problem, bad marriage, etc.
Take the case of Jerry Watkins, an employee of Ackroyd Airlines for 17 years. During his employment, Jerry held positions in accounting, finance, and finally, in purchasing. Jerry and his wife both had college degrees and worked full-time. Jerry and his wife had dreams of sending their three children to college.
Despite their plans for college, the Watkins spent most of what they made and saved very little money for college tuition. Jerry’s oldest son started college at an Ivy League university. Jerry, who handled all of the family finances, found himself unable to pay his son’s college expenses, let alone education expenses for their other two children. Jerry, a "proud" man, could not bring himself to admit his "financial inadequacy" to his wife and children. Jerry could not borrow the money he needed because he already had a large mortgage and other debts.
Because of his financial predicament, Jerry started to embezzle funds from Ackroyd Airlines. In his position as purchasing manager, he found it easy to take kickbacks from a vendor who had approached him with favors to get business. Jerry experienced severe stress as a result of not being able to pay his son’s college tuition that resulted in fraudulent activity.
GREEDY
The employee is not satisfied with the resources available to him. He/She desires more than they have.
In 1981, Barry Minkow, an ambitious sixteen year old high school student, started a carpet cleaning business called ZZZZBest. ZZZZBest initially was a business failure. Minkow ignored the day-to-day operations and cost controls, required of a new organization. By the time he was 17, Minkow was heavily in debt. Despite his debt, Minkow decided to open another location of ZZZZBest. He was determined to have ZZZZBest bring him financial success.
As his expenses increased, Minkow could not meet his debts and turned to insurance fraud to raise money. He would stage a break-in at a ZZZZBest location and claim a loss. Also, Minkow reported fictitious equipment to secure loans, falsified work order contracts to secure loans, stole money orders for cash, and added zeros to customers bills who paid by credit card. Minkow was living the "good life" with a new sports car and condominium.
Minkow decided to make ZZZZBest a public corporation in 1986. Minkow falsified financial statements to greatly improve the financial position of ZZZZBest. In order to avoid the SEC’s scrutiny of the financial statements, Minkow used a backdoor to take his company public called the shell route. He merged ZZZZBest with Morningstar Industries, an inactive Utah mineral exploration firm, and acquired Morningstar’s publicly owned shares in exchange for stock in the newly formed corporation. Minkow personally received 76% of the shares. He was now worth $12 million on paper. Minkow was continually raising money from new investors to pay off old investors. By April of 1987, ZZZZBest stock was selling for $18 a share. The company’s book value was $210 million. Barry Minkow was worth $109 million on paper. In 1987, 21 year-old Minkow met with the Wall Street firm of Drexel, Burnham, Lambert. Drexel agreed to raise $80 million, via junk bonds, for ZZZZBest to buy out KeyServ, a cleaning service.
As a result of numerous television appearances, Minkow became something of a media celebrity. He was featured in Newsweek and American Banker. He developed a reputation as a legend of an entrepreneurial prodigy. However, this reputation would change after an investigative report published in the Los Angeles Times on May 22, 1987. The report identified Minkow as the "whiz kid" behind a trail of false credit card billings. Minkow, the boy wonder, was now the "kid who swindled Wall Street". Within a month ZZZZBest stock plummeted from $18 to $6.
In July 1987, Minkow resigned from ZZZZBest at the age of 22, citing ill health. ZZZZBest shares were selling for just pennies. Minkow was charged with bank, stock, and mail fraud, money laundering, racketeering, conspiracy, and tax evasion. ZZZZBest, a company once purported to be worth hundreds of millions of dollars, auctioned off its entire assets for only $62,000.
FINANCIAL NEED
The employee’s need cannot be satisfied with available resources. Financial need can be the result of major financial losses, drug or alcohol dependencies, illness, gambling losses, greed, or overextended credit.
A bank teller had a $30,000 a day gambling habit on a $11,000 a year salary. In 1970, the chief teller at the Park Avenue branch of New York’s Union Dime Savings Bank embezzled more than $1.5 million from hundreds of accounts. Despite having no formal computer training, he was able to shift nonexistent money around from account to account, falsifying quarterly interest payments and satisfying visiting auditors with ease.
The discovery of the fraud was uncovered by accident. A routine police raid on a bookie revealed that the bank teller had been betting as much as $30,000 a day on sporting events.
DISGRUNTLED OR A COMPLAINER
The employee feels abused by the employer and wants to get even. He/She feels frustrated or dissatisfied about some aspect of their job. The employee may try to get even or take what he/she "really deserves". The employee may feel pay is not commensurate with their job responsibility. In general, the employee is frustrated with the organization. Frustration can result from a number of situations, such as not being promoted, a perception of being underpaid, dislike for a supervisor, a feeling of alienation from other employees, a lack of devotion to the company, fear of losing one’s job, or boredom with the work. The employee has low job morale.
BIG SPENDER
The employee is living beyond his/her means. If the demands of an employee’s lifestyle exceed his/her pay, the employee is a candidate to perpetrate a fraud. The employee may make extravagant purchases or have a lavish lifestyle.
OVERWHELMING DESIRE FOR PERSONAL GAIN
The employee may desire personal gains from their job such as promotions, bonuses, or recognition.
John Spano, the Texas businessman charged with defrauding lenders in a bid to buy the New York Islanders hockey team, wanted the personal recognition that comes with owning a professional sports team. The Dallas businessman pledged $165 million to buy the New York Islanders. The National Hockey League approved his offer. Spano overestimated his financial worth. He convinced others that he was worth $100 million when federal prosecutors say he may have been worth less than $100,000. Spano never had the money even though an executive at CoAmerica Bank in Dallas apparently vouched for his money and Fleet Bank lent him $80 million toward the Islanders’ purchase. Spano forged bank letters and altered documents he sent to the banks. In the end, Spano failed to deliver the checks as promised to the New York Islanders. Spano was arrested on charges of bank and wire fraud. He was accused of making fraudulent claims to obtain a bank loan, making false statements to support his loan application, committing fraudulent acts to obtain the team’s cable-television rights, and spending thousands of dollars of the team’s money after fraudulently assuming ownership. Spano’s love for hockey and desire to own the NHL team led him to his fraudulent activity.
PRESSURED TO PERFORM
The employee may be pressured to meet unrealistic financial expectations.
Cincinnati Reds owner, Marge Schott, was guilty of defrauding General Motors. The names of Cincinnati Reds executives and relatives were among those that General Motors said Schott used to falsify 57 auto sales at her car dealership. The people whose names were involved in the fraud were unaware of the situation and were not involved. GM told Schott in 1995 that her Chevrolet dealership was not meeting company sales standards. In June 1995, Schott reached a settlement with GM that she would surrender the dealership if it did not meet its quotas in two of the final three quarters of 1995 or the first two quarters of 1996. Under pressure to meet the sales quotas, Schott falsified sales to meet quotas.
CLOSE RELATIONSHIP WITH VENDORS/SUPPLIERS
The employee may develop a close or personal relationship that extends beyond proper business relations.
Rick Hendrick, one of the nation’s largest auto dealers in the mid-1990s, was charged with conspiring to bribe Honda executives to get extra cars and dealerships. Hendrick owned Hendrick Management Corporation, which controlled 66 automobile and truck dealerships. Hendrick bribed executives of Honda and, in return, received preferential treatment for getting Honda automobiles as well as receiving Honda dealerships. A top Honda manager testified during a trial in March 1995 that Hendrick helped him purchase two homes. Hendrick acknowledged giving gifts to the manager but claimed they were given as a friend, not to buy influence.
The fraudster can be a CEO, a mail room clerk, or anyone in between—all it takes is opportunity, need, and rationalization. Lower level white-collar employees commit most frauds, but the largest most damaging frauds are committed by senior executives and owners of businesses. Losses caused by managers who committed fraud are four times greater than those committed by lower level employees. Median losses from fraud caused by executives were 16 times greater than those of lower level employees.
This report is intended for informational purposes only. The purpose of the report is to offer a better understanding of the characteristics of those who commit fraudulent activity. The characteristics presented here are intended to help you recognize individuals with a potential for fraud. Use them to help identify occupational fraudsters.
General characteristics of those who commit occupational fraud:
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