Why do Trusted Employees Steal?
By: Greg Taylor / Vice President
Corporate Audit Partners
What makes an employee embezzle funds from an employer? Why are some employees overcome by the temptation to steal and others are not? Every time an employee is caught misappropriating assets, employers ask these same questions. “How could John or Jane steal from our company? I went to his wedding. We went on fishing trips together. I loaned her my car for a week.”
Employees have stolen money from employers from the beginning of time. During the early 1900’s the psychologists of the day, Freud, Skinner, Sutherland, and later Cressey, studied employee defalcation and embezzlement, theorizing on crime causation. In the 1940’s Cressey, one of Sutherland’s star students was working on his PhD formed his dissertation around the causation of embezzlement. His work was published as “Other People’s Money: A Study in the Social Psychology of Embezzlement”. Cressey coined the phrase “trust violators” in his research papers and books as a term for embezzlers. He summarized his final theories as follows:
“Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-sharable, 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, verbalization which enables them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.”
In non-technical terms, Cressey was saying embezzlers have some type of perceived financial problem they feel has to be dealt with secretly and they have the means, motive, and rationalization to fix the problem by embezzling.
What are non-sharable financial problems? They are problems that are unique and overwhelming to the embezzler. These types of problems can be categorized as the four “D’s”. They are Debts and gambling, Divorce or infidelity, Drugs or alcohol abuse, or Disgruntlement or anger related to their job or status at the company. While employees within every company have similar problems such as divorce or debts, most employees resolve these problems without resorting to embezzling.
The process of embezzlement can be thought of as a three-legged chair. Those three factors, non-sharable problem, perceived opportunity, and rationalization must exist before embezzlement can occur.
Taking an example of theft through expense-report abuse, an employee enters a twenty dollars lunch on the expense report when no meal was actually purchased.
The first you can perceive from this act is a financial problem. Perhaps the employee needs the extra twenty dollars to cover a personal expense such as part of a car payment. The second is rationalization. “The employee reasons, “They aren’t paying me enough money. I know so-and-so did it too. I had to wait an extra hour on a plane last week and I should be compensated for my time. I missed my son’s ball game to go on this sales call.” The third leg of the chair is opportunity. The employee knows that the $20.00 is not going to be audited because the company policy of requiring expense receipts starts at $25.00. This is the opportunity; no one will check. If this employee adds an extra $20.00 to their expense report three times each week, for each of the thirty weeks of travel per year, they would supplement their salary by $1,800.00.
How do you, as an employer, prevent embezzlement? At least one leg of the three-legged fraud chair must be cut off.
The first step must be an open door policy. Employees must be made to feel that they can come to the employer with financial problems without feeling they are being judged. Similarly, there needs to be an internal process for employees to air their grievances.
The second step is preventing rationalization. Honesty and ethics flow down from the top of any company. If the executives of the company are cooking the books, making shady deals, or abusing the internal processes and controls, these actions tell other employees that it is okay to steal. A company in mid-America was recently indicted on fraud and embezzlement charges. In a brief to the courts, the attorney general said that fraud and embezzlement were seen as the normal course of business at the company. Not one, not two, but three large cases of defalcation were identified at the company.
An invaluable component of preventing rationalization is adding an employee tip line. According to the Association of Certified Fraud Examiners, anonymous employee tip lines are the number one identifier of embezzlement and fraud within a company. Tips contribute to over 40% of fraud and embezzlement detection. Internal audits and accidents are a distant second and third in detecting defalcation. The setting up of a tip line also signifies that the employer does not tolerate dishonesty and is actively seeking to prevent it.
Lastly, but most importantly is preventing the opportunity. The “opportunity” component of the three-legged chair is the most important and the easiest to control. An employee may have the non-shareable problem and rationalize the theft, but is prevented to commit fraud by the lack of opportunity. Employees must not be given the opportunity to embezzle.
Internal controls should be set up at all risk points in the financial process such as segregation of duties, forcing vacations, modifying process flows, cross training and the auditing of transactions. The perception of auditing is almost as important as the auditing itself. Once an employee believes that transactions are being audited on a regular basis, he or she is less likely to commit fraud. Alone, changing the T&E receipt requirement from $25 to $15 without auditing would be deterrent. However, modifying the reimbursement receipt policy, along with auditing the policy can be invaluable in preventing most embezzlement and abuse.