Corporate Fraud Handbook E-Book

Joseph T. Wells

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 836

Veröffentlichungsjahr: 2017

Beschreibung

Delve into the mind of a fraudster to beat them at their own game Corporate Fraud Handbook details the many forms of fraud to help you identify red flags and prevent fraud before it occurs. Written by the founder and chairman of the Association of Certified Fraud Examiners (ACFE), this book provides indispensable guidance for auditors, examiners, managers, and criminal investigators: from asset misappropriation, to corruption, to financial statement fraud, the most common schemes are dissected to show you where to look and what to look for. This new fifth edition includes the all-new statistics from the ACFE 2016 Report to the Nations on Occupational Fraud and Abuse, providing a current look at the impact of and trends in fraud. Real-world case studies submitted to the ACFE by actual fraud examiners show how different scenarios play out in practice, to help you build an effective anti-fraud program within your own organization. This systematic examination into the mind of a fraudster is backed by practical guidance for before, during, and after fraud has been committed; you'll learn how to stop various schemes in their tracks, where to find evidence, and how to quantify financial losses after the fact. Fraud continues to be a serious problem for businesses and government agencies, and can manifest in myriad ways. This book walks you through detection, prevention, and aftermath to help you shore up your defenses and effectively manage fraud risk. * Understand the most common fraud schemes and identify red flags * Learn from illustrative case studies submitted by anti-fraud professionals * Ensure compliance with Sarbanes-Oxley and other regulations * Develop and implement effective anti-fraud measures at multiple levels Fraud can be committed by anyone at any level--employees, managers, owners, and executives--and no organization is immune. Anti-fraud regulations are continually evolving, but the magnitude of fraud's impact has yet to be fully realized. Corporate Fraud Handbook provides exceptional coverage of schemes and effective defense to help you keep your organization secure.

Leseprobe

Table of Contents

Cover

Title Page

Copyright

Dedication

Preface

About the ACFE

Chapter 1: Introduction

Defining

Occupational Fraud and Abuse

Research in Occupational Fraud and Abuse

2016

Report to the Nations on Occupational Fraud and Abuse

Notes

Part I: Asset Misappropriations

Chapter 2: Introduction to Asset Misappropriations

Overview

Definition of

Assets

How Asset Misappropriations Affect Books of Account

Notes

Chapter 3: Skimming

Overview

Skimming Data from the ACFE 2015

Global Fraud Survey

Unrecorded Sales

Understated Sales and Receivables

Theft of Checks Through the Mail

Short‐Term Skimming

Converting Stolen Checks

Concealing the Fraud

Detection

Prevention

Notes

Chapter 4: Cash Larceny

Overview

Cash Larceny Data from the ACFE 2015

Global Fraud Survey

Incoming Cash

Cash Larceny from the Deposit

Miscellaneous Larceny Schemes

Detection

Prevention

Note

Chapter 5: Check Tampering

Overview

Check Tampering Data from the ACFE 2015

Global Fraud Survey

Forged Maker Schemes

Intercepted Checks

Forged Endorsement Schemes

Altered Payee Schemes

Concealed Check Schemes

Authorized Maker Schemes

Concealment

Detection

Prevention

Electronic Payment Tampering

Notes

Chapter 6: Register Disbursement Schemes

Overview

Register Disbursement Data from the ACFE 2015

Global Fraud Survey

False Refunds

False Voids

Concealing Register Disbursements

Detection

Prevention

Note

Chapter 7: Billing Schemes

Overview

Billing Scheme Data from the ACFE 2015

Global Fraud Survey

Shell Company Schemes

Non‐Accomplice Vendor Schemes

Personal Purchases with Company Funds

Detection

Prevention

Note

Chapter 8: Payroll and Expense Reimbursement Schemes

Overview

Payroll Scheme Data from the ACFE 2015

Global Fraud Survey

Payroll Schemes

Detection of Payroll Schemes

Prevention of Payroll Schemes

Expense Reimbursement Data from the ACFE 2015

Global Fraud Survey

Expense Reimbursement Schemes

Detection of Expense Reimbursement Schemes

Prevention of Expense Reimbursement Schemes

Note

Chapter 9: Inventory and Other Noncash Assets

Overview: Noncash Misappropriation Data from the ACFE 2015

Global Fraud Survey

Misuse of Inventory and Other Assets

Theft of Inventory and Other Assets

Concealment

Detection

Prevention

Misappropriation of Intangible Assets

Notes

Part II: Corruption

Chapter 10: Bribery

Overview

Corruption Data from the ACFE 2015

Global Fraud Survey

Bribery Schemes

Something of Value

Economic Extortion

Illegal Gratuities

Detection

Prevention

Anti‐Corruption Legislation

Notes

Chapter 11: Conflicts of Interest

Overview

Purchasing Schemes

Sales Schemes

Other Schemes

Detection

Prevention

Note

Part III: Financial Statement Fraud

Chapter 12: Accounting Principles and Fraud

Introduction

Fraud in Financial Statements

Major Generally Accepted Accounting Principles

Responsibility for Financial Statements

Users of Financial Statements

Types of Financial Statements

Sarbanes‐Oxley Act

Financial Statement Fraud Data from the ACFE 2015

Global Fraud Survey

Notes

Chapter 13: Financial Statement Fraud Schemes

Overview

Defining

Financial Statement Fraud

Costs of Financial Statement Fraud

Methods of Financial Statement Fraud

Detection of Financial Statement Fraud Schemes

Deterrence of Financial Statement Fraud

Notes

Chapter 14: Occupational Fraud and Abuse: The Big Picture

Defining

Abusive Conduct

Measuring the Level of Occupational Fraud and Abuse

Understanding Fraud Deterrence

Corporate Sentencing Guidelines

Ethical Connection

Concluding Thoughts

Notes

Appendix: Sample Code of Business Ethics and Conduct

Introduction

Conflicts of Interest

Company Assets

Political Contributions

Employee Conduct

Compliance Letter and Conflict‐of‐Interest Questionnaire

Bibliography

Index

End User License Agreement

List of Illustrations

Chapter 01

Exhibit 1.1 The Fraud Triangle

Exhibit 1.2 Fraud Scale

Exhibit 1.3 Hollinger‐Clark Property Deviance

Exhibit 1.4 Hollinger‐Clark Production Deviance

Exhibit 1.5 2015

Global Fraud Survey

: Distribution of Losses

Exhibit 1.6 2015

Global Fraud Survey

: Percentage of Cases and Median Loss by Position of Perpetrator

Exhibit 1.7 2015

Global Fraud Survey

: Median Loss by Gender of Perpetrator

Exhibit 1.8 2015

Global Fraud Survey

: Percentage of Cases by Gender of Perpetrator

Exhibit 1.9 2015

Global Fraud Survey

: Percentage of Cases and Median Loss by Age of Perpetrator

Exhibit 1.10 2015

Global Fraud Survey

: Percentage of Cases and Median Loss by Education Level of Perpetrator

Exhibit 1.11 2015

Global Fraud Survey

: Percentage of Cases and Median Loss by Number of Perpetrators

Exhibit 1.12 2015

Global Fraud Survey

: Percentage of Cases and Median Loss by Department of Perpetrator

Exhibit 1.13 2015

Global Fraud Survey

: Percentage of Cases and Median Loss by Tenure of Perpetrator

Exhibit 1.14 2015

Global Fraud Survey

: Percentage of Cases by Criminal History of Perpetrator

Exhibit 1.15 2015

Global Fraud Survey

: Percentage of Cases and Median Loss by Victim Organization Type

Exhibit 1.16 2015

Global Fraud Survey

: Percentage of Cases by Number of Employees at Victim Organization

Exhibit 1.17 2015

Global Fraud Survey

: Median Loss by Number of Employees at Victim Organization

Exhibit 1.18 2015

Global Fraud Survey

: Frequency of Anti‐Fraud Controls

Exhibit 1.19 2015

Global Fraud Survey

: Impact of Anti‐Fraud Measures on Median Loss

Exhibit 1.20 2015

Global Fraud Survey

: Initial Detection of Occupational Frauds

Exhibit 1.21

2015 Global Fraud Survey

: Major Occupational Fraud Categories

Chapter 03

Exhibit 3.1 2015

Global Fraud Survey

: Cash versus Noncash Schemes

Exhibit 3.2 2015

Global Fraud Survey

: Frequency of Cash Misappropriations

Exhibit 3.3 2015

Global Fraud Survey

: Median Loss of Cash Misappropriations

Exhibit 3.4 Unrecorded Sales

Exhibit 3.5 Understated Sales

Exhibit 3.6 Theft of Incoming Checks

Exhibit 3.7 Short‐term Skimming

Chapter 04

Exhibit 4.1 2015

Global Fraud Survey

: Frequency of Cash Misappropriations

Exhibit 4.2 2015

Global Fraud Survey

: Median Loss of Cash Misappropriations

Exhibit 4.3 Cash Larceny from the Register

Exhibit 4.4 Other Cash Larceny

Exhibit 4.5 Cash Larceny from the Deposit

Chapter 05

Exhibit 5.1 2015

Global Fraud Survey

: Frequency of Fraudulent Disbursements

Exhibit 5.2 2015

Global Fraud Survey

: Median Loss of Fraudulent Disbursements

Exhibit 5.3 Check Graphic

Exhibit 5.4 Forged Maker Schemes

Exhibit 5.5 Forged Endorsement Schemes

Exhibit 5.6 Altered Payee Schemes

Exhibit 5.7 Concealed Check Schemes

Exhibit 5.8 Authorized Maker Schemes

Chapter 06

Exhibit 6.1 2015

Global Fraud Survey

: Frequency of Fraudulent Disbursements

Exhibit 6.2 2015

Global Fraud Survey

: Median Loss of Fraudulent Disbursements

Exhibit 6.3 False Refunds

Exhibit 6.4 False Voids

Chapter 07

Exhibit 7.1 2015

Global Fraud Survey

: Frequency of Fraudulent Disbursements

Exhibit 7.2 2015

Global Fraud Survey

: Median Loss of Fraudulent Disbursements

Exhibit 7.3 False Billing from Shell Companies

Exhibit 7.4 Pay‐and‐Return Schemes

Exhibit 7.5 Invoice Purchasing Schemes

Exhibit 7.6 Purchases on Credit Card or Company Account

Chapter 08

Exhibit 8.1 2015

Global Fraud Survey

: Frequency of Fraudulent Disbursements

Exhibit 8.2 2015

Global Fraud Survey

: Median Loss of Fraudulent Disbursements

Exhibit 8.3 Ghost Employees

Exhibit 8.4 Falsified Hours and Salary

Exhibit 8.5 Commission Schemes

Exhibit 8.6 2015

Global Fraud Survey

: Frequency of Fraudulent Disbursements

Exhibit 8.7 2015

Global Fraud Survey

: Median Loss of Fraudulent Disbursements

Exhibit 8.8 Mischaracterized Expenses

Exhibit 8.9 Overstated Expenses

Exhibit 8.10 Fictitious Expenses

Chapter 09

Exhibit 9.1 2015

Global Fraud Survey

: Cash versus Noncash Schemes

Exhibit 9.2 2015

Global Fraud Survey

: Noncash Cases by Type of Asset Misappropriated

Exhibit 9.3 2015

Global Fraud Survey

: Median Loss in Noncash Cases by Type of Asset Misappropriated

Exhibit 9.4 Noncash Larceny

Exhibit 9.5 False Shipments of Inventory and Other Assets

Exhibit 9.6 Sample Inventory Matrix

Exhibit 9.7 Searches for Schemes

Chapter 10

Exhibit 10.1 2015

Global Fraud Survey

: Major Occupational Fraud Categories

Exhibit 10.2 2015

Global Fraud Survey

: Frequency of Corruption Schemes by Type

Exhibit 10.3 Kickback Schemes

Exhibit 10.4 Bid‐Rigging Schemes

Chapter 11

Exhibit 11.1 Conflicts of Interest

Chapter 12

Exhibit 12.1 Role of Financial Information in the Decision‐making Process

Exhibit 12.2 2015

Global Fraud Survey

: Major Occupational Fraud Categories

Exhibit 12.3 2015

Global Fraud Survey

: Financial Statement Fraud Schemes by Category

Chapter 13

Exhibit 13.1 Income Statement: Incorrectly Stated versus Correctly Stated

Exhibit 13.2 Horizontal and Vertical Analysis

Exhibit 13.3 Ratio Analysis

Guide

Cover

Table of Contents

Begin Reading

Pages

iii

iv

v

xi

xii

xiii

xv

xvi

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

143

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

159

160

161

162

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199

200

201

202

203

204

205

206

207

208

209

210

211

212

213

214

215

216

216

217

218

219

220

221

222

223

224

225

226

227

228

229

230

231

232

233

234

235

236

237

238

239

240

241

242

243

245

246

247

248

249

250

251

252

253

254

255

256

257

258

259

260

261

262

263

264

265

266

267

268

269

270

271

272

273

274

275

276

277

277

278

279

280

281

282

283

284

285

286

287

288

289

290

291

293

294

295

296

297

298

299

300

301

302

303

304

305

306

307

308

309

310

311

312

313

314

315

316

317

318

319

320

321

322

322

323

324

325

326

327

328

329

330

331

332

333

334

335

336

337

338

339

340

341

342

343

344

345

346

347

348

349

350

351

352

353

354

355

356

357

358

359

360

361

362

363

364

365

366

367

368

369

370

371

372

373

374

375

376

377

378

379

379

380

381

382

383

384

385

386

387

388

389

390

391

391

392

393

394

395

396

397

398

399

400

401

402

403

404

405

406

407

408

409

410

411

412

413

414

415

Corporate Fraud Handbook

Prevention and Detection

Fifth Edition

Dr. Joseph T. Wells

Copyright © 2017 by Association of Certified Fraud Examiners. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Fourth edition published in 2013 by John Wiley & Sons, Inc.Third edition published in 2011 by John Wiley & Sons, Inc.Second edition published in 2007 by John Wiley & Sons, Inc.First edition published in 2004 by John Wiley & Sons, Inc.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.

Library of Congress Cataloging-in-Publication Data is Available:

ISBN 9781119351986 (Hardcover)ISBN 9781119351931 (ePDF)ISBN 9781119351955 (ePub)

Cover Design: WileyCover Image: © no_limit_pictures / Getty Images

To my loving wife, Judy Gregor Wells

Preface

As I wrote in my fifth book, Occupational Fraud and Abuse, few people begin their careers with the goal of becoming liars, cheats, and thieves. Yet that turns out to be the destiny of all too many. Corporate fraud and abuse—as we have seen in such headline‐grabbing cases as Enron, WorldCom, Olympus, and Toshiba—costs organizations and investors billions and billions annually. The losses in human terms are incalculable.

Corporate Fraud Handbook: Prevention and Detection is for those whose job it is to reduce these losses: fraud examiners, auditors, investigators, loss prevention specialists, managers and business owners, criminologists, human resources personnel, academicians, and law enforcement professionals, among others.

There are four broad objectives of this work:

To detail a classification system to explain the various schemes used by executives, owners, managers, and employees to commit these offenses

To quantify the losses from these schemes

To illustrate the human factors in fraud

To provide guidance in preventing and detecting occupational fraud and abuse

How this book came about is a story in itself. As improbable as it seems looking back, I am well into my fourth decade in the field of fraud detection and deterrence. Like many of you, my career path did not start where it ended up. In the third grade, I distinctly remember pledging to be an astronomer. But by college, quantum physics had proved my undoing. Just a few credits shy of a math/physics degree, I switched to business school and majored in accounting.

After two years toiling in the ledgers of one of the large international auditing firms, I decided I could not stand it anymore; my life had to have more excitement. So I became a real‐life, gun‐toting FBI agent. Thankfully, I did not have to use my pistol too many times to track down heinous robbers. And I learned in a hurry that the expensive crimes were not the bank robberies, anyhow—they were the bank embezzlements. For the next nine years, I specialized exclusively in investigating a wide range of white‐collar crimes in which the federal government was a party at interest. The cases ran the gamut, from nickel‐and‐dime con artists to Watergate.

My second decade was with Wells & Associates, a group of consulting criminologists concentrating on white‐collar crime prevention, detection, and education. That eventually led to the formation of a professional organization, the Association of Certified Fraud Examiners. For more than 25 years, I have been chairman of the Board of Directors. I hope to spend the remainder of my professional career with what I have discovered to be my secret love: writing.

Corporate Fraud Handbook: Prevention and Detection has its genesis in Occupational Fraud and Abuse. At the time, I was intrigued by the definition of fraud as classically set forth in Black's Law Dictionary:

All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprise, trick, cunning or dissembling, and any unfair way by which another is cheated.

This definition implied to me that there was an almost unlimited number of ways people could think up to cheat one another. But my experience told me something else: After investigating and researching literally thousands of frauds, they seemed to fall into definite patterns. If we could somehow determine what those patterns were and in what frequency they occurred, it would aid greatly in understanding and ultimately preventing fraud. And since so much fraud occurs in the workplace, this particular area would be the starting point.

So I began a research project with the aid of more than 2,000 Certified Fraud Examiners (CFEs). They typically work for organizations in which they are responsible for aspects of fraud detection and deterrence. Each CFE provided details on exactly how their organizations were being victimized from within. That information subsequently was summarized in a document for public consumption, the 1996 Report to the Nation on Occupational Fraud and Abuse. Since that time, the report has been published on eight occasions, the latest being in 2016.

Although the reports provide a basic framework, this book is intended for a different audience—those of you who need to know all the details. You will discover that while fraud may outwardly seem complex, it rarely is. You do not need an accounting degree—just an understanding of fundamental business procedures and terminology. As the saying could go, fraud ain't rocket science.

Rather than an unlimited number of schemes, this book suggests that occupational fraud and abuse can be divided into three main categories: asset misappropriation, corruption, and financial statement fraud. From the three main categories, we identified and classified several distinct schemes, and they are covered in detail herein.

The book begins with an overview of the complex social factors that go into creating an occupational offender. People do things for a reason, and understanding why employees engage in this behavior is the key to creating ways to prevent it. You will therefore find these pages rich in personal detail.

Following the introduction, the book is divided into chapters devoted to the specific occupational fraud and abuse schemes. Each of the chapters is organized similarly. First, a case study provides insights. Next, the scheme itself is flowcharted and the scheme variations are scheduled, along with statistics for each method. Finally, observations and conclusions on each chapter will help in devising prevention and detection strategies.

A project such as this is not a solo venture, even though I accept final responsibility for every word, right or wrong. I must first gratefully acknowledge the thousands of CFEs who have provided the case examples and participated in the ACFE's studies over the years. I am especially appreciative of the efforts of John Warren, who did much of the detailed research. Jim Ratley, Jeanette LeVie, John Gill, Andi McNeal, and Nancy Bradford also merit special recognition. Mary‐Jo Kranacher provided invaluable guidance in Chapters 12 and 13. Several writers assisted in preparing case studies: Michael C. Burton, Sean Guerrero, Brett Holloway‐Reeves, Katherine McLane, Suzy Spencer, and Denise Worhach.

Special thanks go to the CFEs and other professionals who furnished details of their cases: Bradley Brekke, CFE; Anthony J. Carriuolo, Esq.; H. Craig Christiansen, CFE, CPA; Harvey Creem, CFE, CPA; Jim Crowe, CFE; Harry D'Arcy, CFE; Marvin Doyal, CFE, CPA; Tonya L. DiGiuseppe, CFE, CPA; Harold Dore, CFE, CIA; Stephen Gaskell, CFE; Gerald L. Giles, Jr., CFE, CPA; Paul Granetto; James Hansen, CFE; Paul Hayes, CFE; Charles Intriago, Esq.; Terry Isbell, CFE, CIA; Douglas LeClaire, CFE; Barry Masuda, CFE; Terrence McGrane, CFE, CIA; David McGuckin, CFE; David Mensel, CFE, CPA; Dick Polhemus, CFE; Trudy Riester, CFE; Lee Roberts, CFE; Peter Roman, CFE; James Sell, CFE, CPA; Harry J. Smith III, CFE, CPA; and Donald Stine, CFE, CPA.

Finally, I must thank the one person without whom these pages would not have been written. My wife, Judy, has endured countless weekends and early mornings alone while I sat at this keyboard. She has become accustomed to my jumping up in the middle of dinner to write down a new thought on a scrap of paper. And she has done every bit of it by cheering me on, never complaining. First to Judy Gregor Wells—then to those of you trying to make a better world by reducing fraud—this book is dedicated.

Joseph T. WellsAustin, TexasNovember 2016

About the ACFE

The Association of Certified Fraud Examiners (ACFE) is the world's largest anti‐fraud organization and premier provider of anti‐fraud training and education. Together with more than 80,000 members, the ACFE is reducing business fraud worldwide and inspiring public confidence in the integrity and objectivity within the profession.

Established in 1988, with headquarters in Austin, Texas, the ACFE supports the anti‐fraud profession by providing expert instruction, practical tools, and innovative resources in the fight against fraud. The ACFE hosts conferences and seminars year‐round while offering informative books and self‐study courses written by leading practitioners to help members learn how and why fraud occurs and to build the skills needed to fight it effectively. Members of the ACFE also have the ability to expand their anti‐fraud knowledge and assert themselves as experts in the anti‐fraud community by obtaining the Certified Fraud Examiner (CFE) credential. This globally preferred certification indicates expertise in fraud prevention, deterrence, detection, and investigation. The ACFE oversees the CFE credential by setting standards for admission, administering the CFE examination, and maintaining and enforcing the ACFE Code of Professional Ethics.

The ACFE is also committed to providing educational resources to the academic community and has established the Anti‐Fraud Education Partnership to address the unprecedented need for fraud examination education at the university level. In pursuit of this objective, the ACFE has provided free training and educational materials to institutions of higher learning throughout the world.

Criminologist and former FBI agent Dr. Joseph T. Wells, CFE, CPA, is chairman and founder of the ACFE as well as an advisory member of the Board of Regents. Dr. Wells has lectured to tens of thousands of business professionals, written 22 books, and authored scores of articles and research projects. His writing has won numerous awards, including the top articles of the year for both the Internal Auditor and the Journal of Accounting magazines, and he is a winner of the Innovation in Accounting Education Award presented by the American Accounting Association. He was named to Accounting Today magazine's annual list of the “Top 100 Most Influential People” in accounting nine times. In 2010, for his contributions to the anti‐fraud field, he was honored as a Doctor of Commercial Science by York College of the City University of New York.

Labeled “the premier financial sleuthing organization” by the Wall Street Journal, the ACFE has also been cited for its efforts against fraud by media outlets such as BBC, U.S. News & World Report, The New York Times, CNN, CNBC, Fortune, ABC‐TV's Nightline and 20/20, and CBS News' 60 Minutes.

Further information about the ACFE is available at ACFE.com, or (800) 245‐3321.

CHAPTER 1Introduction

In the world of commerce, organizations incur costs to produce and sell their products or services. These costs run the gamut: labor, taxes, advertising, occupancy, raw materials, research and development, and, yes—fraud and abuse. The latter cost, however, is fundamentally different from the former: The true expense of fraud and abuse is hidden, even if it is reflected in the profit‐and‐loss figures.

For example, suppose the advertising expense of a company is $1.2 million. But unknown to the company, its marketing manager is in collusion with an outside ad agency and has accepted $300,000 in kickbacks to steer business to that firm. That means the true advertising expense is overstated by at least the amount of the kickback—if not more. The result, of course, is that $300,000 comes directly off the bottom line, out of the pockets of the investors and the workforce.

DEFINING OCCUPATIONAL FRAUD AND ABUSE

The example just given is clear‐cut, but much about occupational fraud and abuse is not so well defined, as we will see. Indeed, there is widespread disagreement on what exactly constitutes these offenses.

For purposes of this book, occupational fraud and abuse is defined as “the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets.”1

This definition's breadth means that it involves a wide variety of conduct by executives, employees, managers, and principals of organizations, ranging from sophisticated investment swindles to petty theft. Common violations include asset misappropriation, financial statement fraud, corruption, pilferage and petty theft, false overtime, use of company property for personal benefit, and payroll and sick time abuses. Four elements common to these schemes were reported by the Association of Certified Fraud Examiners (ACFE) in its first Report to the Nation on Occupational Fraud and Abuse, released in 1996: “The key is that the activity (1) is clandestine, (2) violates the employee's fiduciary duties to the organization, (3) is committed for the purpose of direct or indirect financial benefit to the employee, and (4) costs the employing organization assets, revenues, or reserves.”2

An employee, in the context of this definition, is any person who receives regular and periodic compensation from an organization for his or her labor. The term is not restricted to the rank‐and‐file staff members; it also includes corporate executives, company presidents, top and middle managers, contract employees, and other workers.

Defining Fraud

In the broadest sense, fraud can encompass any crime for gain that uses deception as its principal modus operandi. Of the three ways to illegally relieve a victim of money—force, trickery, or larceny—all offenses that employ trickery are frauds. Thus, deception is the linchpin of fraud.

However, while all frauds involve some form of deception, not all deceptions are necessarily frauds. Under common law, four general elements must be present for a fraud to exist:

A material false statement

Knowledge that the statement was false when it was uttered

Reliance of the victim on the false statement

Damages resulting from the victim's reliance on the false statement

The legal definition is the same whether the offense is criminal or civil; the difference is that criminal cases must meet a higher burden of proof.

Let's assume an employee who worked in the warehouse of a computer manufacturer stole valuable computer chips when no one was looking and resold them to a competitor. This conduct is certainly illegal, but what law has the employee broken? Has he committed fraud? Has he committed theft? The answer, of course, is that it depends. Employees have a recognized fiduciary relationship with their employers under the law. Let's briefly review the legal ramifications of the theft.

The term fiduciary, according to Black's Law Dictionary, is of Roman origin and refers to

One who owes to another the duties of good faith, trust, confidence, and candor.

The term fiduciary relationship is further defined as

A relationship in which one person is under a duty to act for the benefit of the other on matters within the scope of the relationship. Fiduciary relationships—such as trustee‐beneficiary, guardian‐ward, agent‐principal, and attorney‐client—require the highest duty of care.3

So, in our example, the employee has not only stolen the chips; in so doing, he has violated his fiduciary duty. That makes him an embezzler. Embezzlement is defined as

The fraudulent taking of personal property with which one has been entrusted, esp. as a fiduciary. The criminal intent for embezzlement—unlike larceny and false pretenses—arises after taking possession (not before or during the taking).4

In other words, embezzlement is a special type of fraud.

Under tort and criminal law, conversion is

The wrongful possession or disposition of another's property as if it were one's own; an act or series of acts of willful interference, without lawful justification, with any chattel in a manner inconsistent with another's right, whereby that other person is deprived of the use and possession of the chattel.5

So by stealing the chips, the employee also engages in conversion of the company's property.

The legal term for stealing is larceny, which is

The unlawful taking and carrying away of someone else's personal property with the intent to deprive the possessor of it permanently. Common‐law larceny has been broadened by some statutes to include embezzlement and false pretenses, all three of which are often subsumed under the statutory crime of “theft.”6

As a matter of law, the employee in question could be charged with a wide range of criminal and civil conduct: fraud, embezzlement, obtaining money under false pretenses, or larceny. As a practical matter, he probably will be charged with only one offense, commonly larceny.

Larceny by trick is a type of larceny

in which the taker misleads the rightful possessor, by misrepresentation of fact, into giving up possession of (but not title to) the goods. —Also termed larceny by trick and deception; larceny by trick and device; larceny by fraud and deception.7

The fraudulent aspect of occupational frauds, then, deals with the employee's fiduciary duties to the organization. If those duties are violated, that action may be considered fraud in one of its many forms. Under the definition of occupational fraud and abuse in this book, the activity must be clandestine. Black's Law Dictionary defines clandestine as “secret or concealed, especially for illegal or unauthorized purposes.”8

Defining Abuse

Obviously, not all misconduct in the workplace meets the definition of fraud. A litany of abusive practices plagues organizations, causing lost dollars or resources but not actually constituting fraud. As any employer knows, it is hardly out of the ordinary for employees to:

Use employee discounts to purchase goods for friends and relatives.

Take supplies or use equipment belonging to the organization.

Get paid for more hours than worked.

Collect more money than due on expense reimbursements.

Take a long lunch or break without approval.

Come to work late or leave early.

Use sick leave when not sick.

Do slow or sloppy work.

Work under the influence of alcohol or drugs.

Surf the Internet on the job.

Attend to personal matters during business hours.

The term abuse has taken on a largely amorphous meaning over the years, frequently being used to describe any misconduct that does not fall into a clearly defined category of wrongdoing. Merriam‐Webster's states that the word abuse comes from the Latin word abusus—to consume—and that it means “1. A corrupt practice or custom; 2. Improper or excessive use or treatment: misuse.”9

Given the commonality of the language describing both fraud and abuse, what are the key differences? An example illustrates: Suppose a teller was employed by a bank and stole $100 from her cash drawer. We would define that broadly as fraud. But if the teller earns $500 a week and falsely calls in sick one day, we might call that abuse—even though each has the exact same economic impact to the company—in this case, $100.

And, of course, each offense requires a dishonest intent on the part of the employee to victimize the company. Look at the way each is typically handled within an organization, though: In the case of the embezzlement, the employee gets fired; there is also a possibility (albeit remote) that she will be prosecuted. In the case in which the employee misuses sick time, she perhaps gets reprimanded, or her pay is docked for the day.

But we also can change the abuse example slightly. Let us say the employee works for a governmental agency instead of in the private sector. Sick leave abuse—in its strictest interpretation—could be a fraud against the government. After all, the employee has made a false statement for financial gain (to keep from getting docked). Government agencies can and have prosecuted flagrant instances of sick leave abuse. Misuse of public money in any form can end up being a serious matter, and the prosecution thresholds can be surprisingly low.

Here is one real example: Many years ago I was a rookie FBI agent assigned to El Paso, Texas. That division covered the Fort Bliss military reservation, a sprawling desert complex. There were rumors that civilian employees of the military commissary were stealing inventory and selling it out the back door. The rumors turned out to be true, albeit slightly overstated. But we did not know that at the time.

So around Thanksgiving, the FBI spent a day surveying the commissary's back entrance. We had made provisions for all contingencies—lots of personnel, secret vans, long‐range cameras—the works. But the day produced only one measly illegal sale out the back door: several frozen turkeys and a large bag of yams. The purchaser of the stolen goods tipped his buddy $10 for merchandise valued at about $60. The offense occurred late in the day. We were bored and irritated, and we pounced on the purchaser as he exited the base, following him out the gate in a caravan of unmarked cars with red lights. The poor guy was shaking so badly that he wet his pants. I guess he knew better than we did what was at stake.

Because he was in the wrong place at the wrong time and did the wrong thing, our criminal paid dearly: He pleaded guilty to a charge of petty theft. So did his buddy at the commissary. The employee was fired. But the purchaser, it turned out, was a retired military colonel with a civilian job on the base—a person commonly known as a double dipper. He was let go from a high‐paying civilian job and now has a criminal record. But most expensively, I heard he lost several hundred thousand dollars in potential government retirement benefits. Would the same person be prosecuted for petty theft today? It depends entirely on the circumstances. But it could, and does, happen.

The point here is that the term abuse is often used to describe a variety of petty crimes and other counterproductive behavior that have become common, and are even silently condoned, in the workplace. The reasons employees engage in these abuses are varied and highly complex. Do abusive employees eventually turn into out‐and‐out thieves and criminals? In some instances, yes. We will describe that later. But next we turn to some classic research into why so‐called good employees turn bad. Although some of these studies are decades old, they are landmarks in the anti‐fraud field.

RESEARCH IN OCCUPATIONAL FRAUD AND ABUSE

Edwin H. Sutherland

Considering its enormous impact, relatively little research has been done on the subject of occupational fraud and abuse. Much of the current literature is based on the early works of Edwin H. Sutherland (1883–1950), a criminologist at Indiana University. Sutherland was particularly interested in fraud committed by the elite upper‐world business executive, whether against shareholders or against the public. As renowned criminologist Gilbert Geis noted, Sutherland said,

General Motors does not have an inferiority complex, United States Steel does not suffer from an unresolved Oedipus problem, and the DuPonts do not desire to return to the womb. The assumption that an offender may have such pathological distortion of the intellect or the emotions seems to me absurd, and if it is absurd regarding the crimes of businessmen, it is equally absurd regarding the crimes of persons in the economic lower classes.10

For the uninitiated, Sutherland is to the world of white‐collar criminality what Freud is to psychoanalysis. Indeed, it was Sutherland who coined the term white‐collar crime in 1939. He intended the definition to mean criminal acts of corporations and individuals acting in their corporate capacity, but since that time the term has come to mean almost any financial or economic crime, from the mailroom to the boardroom.

Many criminologists, myself included, believe that Sutherland's most important contribution to criminal literature lay elsewhere. Later in his career, Sutherland developed the theory of differential association, which is now among the most widely accepted theories of criminal behavior. Until Sutherland's landmark work in the 1930s, most criminologists and sociologists held the view that crime was genetically based—that criminals beget criminal offspring.

Although this argument may seem naive today, it was based largely on the observation of non–white‐collar offenders—the murderers, rapists, sadists, and hooligans who plagued society. Numerous subsequent studies have indeed established a genetic base for “street” crime, which must be tempered by environmental considerations. (For a thorough explanation of the genetic base for criminality, see Crime & Human Nature: The Definitive Study of the Causes of Crime by Wilson and Herrnstein.11) Sutherland was able to explain crime's environmental considerations through the theory of differential association. The theory's basic tenet is that crime is learned, much as are math, English, and guitar playing.12

Sutherland believed that learning of criminal behavior occurred with other persons in a process of communication. Therefore, he reasoned, criminality cannot occur without the assistance of other people. Sutherland further theorized that the learning of criminal activity usually occurred within intimate personal groups. In his view, this explains how a dysfunctional parent is more likely to produce dysfunctional offspring. Sutherland believed that the learning process involved two specific areas: the techniques for committing crime; and the attitudes, drives, rationalizations, and motives of the criminal mind. You can see how Sutherland's differential association theory fits with occupational offenders: Dishonest employees will eventually infect a portion of honest ones, but honest employees will also eventually have an influence on some dishonest ones.

Donald R. Cressey

One of Sutherland's brightest students at Indiana University during the 1940s was Donald R. Cressey (1919–1987). Although much of Sutherland's research concentrated on upper‐world criminality, Cressey took his own studies in a different direction. Working on his doctorate in criminology, he decided to concentrate on embezzlers. Accordingly, Cressey arranged for permission to visit prisons in the Midwest and eventually interviewed about 200 incarcerated inmates.

Cressey's Hypothesis

Cressey was intrigued by embezzlers, whom he called “trust violators.” He was especially interested in the circumstances that led them to be overcome by temptation. For that reason, he excluded from his research those employees who took their jobs for the purpose of stealing—a relatively minor number of offenders at that time. Upon completion of his interviews, he developed what still remains the classic model for the occupational offender. His research was published in Other People's Money: A Study in the Social Psychology of Embezzlement.13

Cressey's final hypothesis was:

Trusted persons become trust violators when they conceive of themselves as having a financial problem which is nonsharable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.14

Over the years, the hypothesis has become better known as the fraud triangle. (See Exhibit 1.1.) The first leg of the triangle represents a perceived nonsharable financial need, the second leg represents perceived opportunity, and the third leg stands for rationalization. As Cressey said:

When the trust violators were asked to explain why they refrained from violation of other positions of trust they might have held at previous times, or why they had not violated the subject position at an earlier time, those who had an opinion expressed the equivalent of one or more of the following quotations: (a) “There was no need for it like there was this time.” (b) “The idea never entered my head.” (c) “I thought it was dishonest then, but this time it did not seem dishonest at first.”15

In all cases of trust violation encountered, the violator considered that a financial problem which confronted him could not be shared with persons who, from a more objective point of view, probably could have aided in the solution of the problem.16

Exhibit 1.1The Fraud Triangle

Nonsharable Problems

What, of course, is considered nonsharable is wholly in the eyes of the potential occupational offender, Cressey noted:

Thus a man could lose considerable money at the race track daily but the loss, even if it construed a problem for the individual, might not constitute a nonsharable problem for him. Another man might define the problem as one which must be kept secret and private, that is, as one which is nonsharable. Similarly, a failing bank or business might be considered by one person as presenting problems which must be shared with business associates and members of the community, while another person might conceive these problems as nonsharable.17

Cressey divided these nonsharable problems into six basic subtypes:

Violation of ascribed obligations

Problems resulting from personal failure

Business reversals

Physical isolation

Status gaining

Employer–employee relations

Violation of Ascribed Obligations

Violation of ascribed obligations—the specter of being unable to pay one's debts—has historically proved a strong motivator of financial crimes.

Financial problems incurred through non‐financial violations of positions of trust often are considered as nonsharable by trusted persons since they represent a threat to the status which holding the position entails. Most individuals in positions of financial trust, and most employers of such individuals, consider that incumbency in such a position necessarily implies that, in addition to being honest, they should behave in certain ways and should refrain from participation in some other kinds of behavior.18

In other words, the mere fact that a person has a trusted position brings with it the implied duty to properly manage money.

When persons incur debts or in some other way become financially obligated as a result of violation of the obligations ascribed to the role of trusted person, they frequently consider that these debts must be kept secret, and that meeting them becomes a nonsharable financial problem. In many instances, the insurance of such debts is also considered incompatible with the duties and obligations of other roles which the person might be enacting, such as those of a husband or father, but the concern here is with such debts only as they represent conflict with the person's role as a trusted person.19

Cressey describes a situation we can all appreciate—not being able to pay one's debts, and then having to admit it to one's employer, family, or friends.

Problems Resulting from Personal Failures

Problems resulting from personal failures, Cressey writes, can be of several different types.

While some pressing financial problems may be considered as having resulted from “economic conditions”…others are considered to have been created by the misguided or poorly planned activities of the individual trusted person. Because he fears a loss of status, the individual is afraid to admit to anyone who could alleviate the situation the fact that he has a problem which is a consequence of his “own bad judgment” or “own fault” or “own stupidity.”20

In short, pride goeth before the fall. If the potential offender has a choice between covering poor investment choices through a violation of trust and admitting to be an unsophisticated investor, it is easy to see how the judgment of some prideful people could be clouded.

Business Reversals

Business reversals were the third area Cressey detailed as a part of the nonsharable problem. He saw these as different from personal failures, since many businesspeople consider their financial reverses as coming from conditions beyond their control: inflation, high interest rates, raising capital, and borrowing money. Cressey quoted the remarks of one businessman who borrowed money from a bank using fictitious collateral:

Case 36. There are very few people who are able to walk away from a failing business. When the bridge is falling, almost everyone will run for a piece of timber. In business there is this eternal optimism that things will get better tomorrow. We get to working on the business, keeping it going, and we almost get mesmerized by it…. Most of us don't know when to quit, when to say, “This one has me licked. Here's one for the opposition.”21

Physical Isolation

The fourth category of nonsharable problems Cressey described is physical isolation, in which the person in financial straits is isolated from the people who can help him. It's not that the person is afraid to share his problem; it's that he has no one with whom to share the problem. He is in a situation in which he has no access to trusted friends or associates who would otherwise be able to help.

Status Gaining

The fifth category consists of problems relating to status gaining. Although these problems are easily passed off as living beyond one's means or spending money lavishly, Cressey was interested more in their behavioral implications. He noted:

The structuring of status ambitions as being nonsharable is not uncommon in our culture, and it again must be emphasized that the structuring of a situation as nonsharable is not alone the cause of trust violation. More specifically, in this type of case a problem appears when the individual realizes that he does not have the financial means necessary for continued association with persons on a desired status level, and this problem becomes nonsharable when he feels that he can neither renounce his aspirations for membership in the desired group nor obtain prestige symbols necessary to such membership.22

In other words, it is not the desire for a better lifestyle that creates the nonsharable problem (we all want a better lifestyle); rather, it is the inability to obtain the finer things through legitimate means, and, at the same time, an unwillingness to settle for a lower status, that creates the motivation for trust violation. This problem might be referred to as the keeping‐up‐with‐the‐Joneses syndrome.

Employer–Employee Relations

Finally, Cressey described problems resulting from employer–employee relationships. The most common situation, he stated, was that of an employed person who resents his status within the organization in which he is trusted. The resentment can come from perceived economic inequities, such as pay, or from the feeling of being overworked or underappreciated. Cressey said this problem becomes nonsharable when the individual believes that making suggestions to alleviate perceived maltreatment will possibly threaten his or her status in the organization. There is also a strong motivator for the perceived employee to want to seek revenge when he or she feels ill‐treated.

A Personal Experience

One of my best‐remembered examples involves a personal experience, and not a pleasant one. Most people—if they admit the truth—will have stolen on the job at some time in their careers. Some of the thefts are major, some minor. Some are uncovered; many never are. With this preamble (and the fact that the statute of limitations has long expired!), I will tell you the story of one employee thief: me.

The incident occurred during college. Like many of you, I did not work my way through the university just for experience; it was a necessity. One of my part‐time jobs was as a salesperson in a men's clothing store, a place I'll call Mr. Zac's. It seems that Mr. Zac had the imagination to name the store after himself, which may give you a clue as to the kind of person he was.

My first day on the job, it became clear by talking to the other employees that they strongly disliked Mr. Zac. It did not take long to figure out why: He was cheap beyond all reason; he was sore‐tempered, paranoid, and seemed to strongly resent having to pay the employees who were generating his sales. Mr. Zac was especially suspicious of the help stealing. He always eyed the employees warily when they left in the evening, I assume because he thought their clothing and bags were stuffed with his merchandise. So his employees figured out novel ways to steal for no other reason than to get back at Mr. Zac. I was above all that, or so I thought. But then Mr. Zac did something to me personally, and my attitude changed completely.

One day I was upstairs in the storeroom getting merchandise off the top shelf. Since the high reach had pulled my shirttail out, I was standing there tucking it in when Mr. Zac walked by. He didn't say a word. I went back downstairs to work and thought no more of it. But ten minutes later Mr. Zac called me into his small, cubbyhole office, closed the door, and asked, “What were you tucking in your pants upstairs?” Just my shirt, I replied. “I don't believe you,” Mr. Zac said. “Unless you unzip your pants right now and show me, you're fired.” At first, of course, it did not register that he was serious. When it finally did, I was faced with a dilemma: Unzip my pants for the boss, or be late on the rent and face eviction. I chose the former, but as I stood there letting my pants fall down around my knees, my face burned with anger and embarrassment. Never before had I been placed in a position like this—having to undress to prove my innocence.

After seeing for himself that I didn't have any of his precious merchandise on my person, Mr. Zac sent me back to the sales floor. I was a different person, though. No longer was I interested in selling merchandise and being a good employee. I was interested in getting even, and that's what I did. Over the next few months I tried my best to steal him blind—clothing, underwear, outerwear, neckties—you name it. With the help of some of the other employees, we even stole a large display case. He never caught on, and eventually I quit the job. Was I justified in stealing from Mr. Zac? Absolutely not. At this age, given the same circumstances, would I do it again? No. But at that particular time, I was young, idealistic, very headstrong, and totally fearless. Criminologists have documented that the reason so many young people lack fear is because they do not yet realize actions can have serious consequences; it never occurred to me that I could have gone to jail for stealing from Mr. Zac.

The impact of job loyalty—or, like Mr. Zac's employees, the lack of it—is an important consideration in the occupational fraud and abuse formula. With changes in the American workforce, we may or may not experience more fraud‐related problems. Much has been written recently concerning the downsizing, outsourcing, and increased employee turnover in business. If the employee of the future is largely a contract worker, much of the incentive of loyalty toward organizations could be lost. Such a trend seems to be underway, but its real fraud impact has not been determined. However, fraud is only one cost of doing business. If the outsourcing of corporate America does indeed cause more occupational fraud and abuse, the benefits of restructuring may be seen as outweighing the cost of more crime, at least in the short term. In the long run, it is difficult to justify how employees stealing from organizations can be beneficial to anyone. That was Cressey's theory, too.

Sociological Factors

Since Cressey's study was done in the early 1950s, the workforce was obviously different from that of today. But the employee faced with an immediate, nonsharable financial need has not changed much over the years. That employee is still placed in the position of having to find a way to relieve the pressure that bears down upon him. But simply stealing money is not enough; Cressey pointed out that for the trust violator, it is necessary that he believe his financial situation can be resolved in secret. Cressey said:

In all cases [in the study] there was a distinct feeling that, because of activity prior to the defalcation, the approval of groups important to the trusted person had been lost, or a distinct feeling that present group approval would be lost if certain activity were revealed [the nonsharable financial problem], with the result that the trusted person was effectively isolated from persons who could assist him in solving problems arising from that activity.

Although the clear conception of a financial problem as nonsharable does not invariably result in trust violation, it does establish in trusted persons a desire for a specific kind of solution to their problems. The results desired in the cases encountered were uniform: the solution or partial solution of the problem by the use of funds which can be obtained in an independent, relatively secret, safe, and sure method in keeping with the “rationalizations” available to the person at the time.23

Cressey pointed out that many of his subjects in the study mentioned the importance of resolving the problem secretly.

Cressey also discovered, by talking to his trust violators, that they did not see their positions as a point of possible abuse until after they were confronted with the nonsharable financial problem. They used words such as “it occurred to me” or “it dawned on me” that the entrusted monies could be used to cure their vexing situations. In Cressey's view, the trust violator must have two prerequisites: general information and technical skill. With respect to general information, the fiduciary capacity of an employee in and of itself implies that, since it is a position of trust (read: no one is checking), it can be violated.

Cressey said that in addition to general information, the trust violator must have the technical skills required to pull off the fraud in secret. He observed:

It is the next step which is significant to violation: the application of the general information to the specific situation, and conjointly, the perception of the fact that in addition to having general possibilities for violation, a specific position of trust can be used for the specific purpose of solving a nonsharable problem…. The statement that trusted persons must be cognizant of the fact that the entrusted funds can be used secretly to solve the nonsharable problem is based upon observations of such applications of general information to specific situations.24

Cressey believed that, based on observations, it was difficult to distinguish which came first: the need for the funds, or the realization that they could be secretly used. In other words, did the person have a “legitimate” need for the funds before figuring out how to get his or her hands on them secretly? Or did the person see secret access to funds and find a justification to use them?

Next, Cressey delved into the inner workings of the offenders' minds: How were they able to convince themselves that stealing was okay? He found they were able to excuse their actions to themselves by viewing their crimes in one of three ways:

As noncriminal

As justified

As part of a situation that the offenders do not control

These methods he generalized as “rationalizations.” In his studies, Cressey discovered that “in cases of trust violation encountered, significant rationalizations were always present before the criminal act took place, or at least at the time it took place, and, in fact, after the act had taken place the rationalization often was abandoned.”25 That is, of course, because of the nature of us all: The first time we do something contrary to our morals, it bothers us. As we repeat the act, it becomes easier. One hallmark of occupational fraud and abuse offenders is that once the line is crossed, the illegal acts become more or less continuous.

One of the simplest ways to justify unacceptable conduct and avoid guilt is to invent a good reason for embezzling—one sanctioned in the social group as a greater good. Thus, the trust violator's self‐image, should she be discovered, must be explainable to herself and others around her.

Offender Types

For further analysis, Cressey divided the subjects into three groups:

Independent businessmen

Long‐term violators

Absconders

He discovered that each group had its own types of rationalizations.

Independent Businessmen

Businessmen, for example, used one of two common excuses: (1) They were “borrowing” the money that they converted, or (2) the funds entrusted to them were really theirs—you cannot steal from yourself. Cressey found the “borrowing” rationalization was the most frequently used. Such perpetrators also tended to espouse the idea that “everyone” in business misdirects deposits in some way, a fact that they considered would make their own misconduct less wrong than “stealing.” Also, the independent businessmen almost universally felt that their illegal actions were predicated by an “unusual situation” that Cressey perceived to actually be a nonsharable financial problem.

Long‐Term Violators

Cressey defined long‐term violators as individuals who converted their employer's funds, or funds belonging to their employer's clients, by taking relatively small amounts over some duration of time. Much like independent businessmen, the long‐term violators Cressey studied generally preferred the “borrowing” rationalization. He also described other rationalizations of long‐term violators:

They were embezzling to keep their families from shame, disgrace, or poverty.

Theirs was a case of “necessity”; their employers were cheating them financially.

Their employers were dishonest toward others and deserved to be fleeced.