Why do good managers commit fraud?

Why do employees in managerial positions commit fraud? If we consider that fraud at the top management level causes much greater damage to the economy of the company than ordinary employees. According to Report to the nations for 2020

  1. Owners/executives accounted for a small percentage of cases (20%) but caused a larger loss of $600,000.
  2. Fraudsters who had been with their company longer stole twice as much.
  3. Only 4% of perpetrators had a prior fraud conviction.
  4. A majority of the victims recovered nothing.

On the graph, we can see how managers of companies cheat, and the average damage they cause. As we can see, the most common type of fraud brings the lowest losses. But here 10% of cases of fraud with financial reporting led to an average loss of $800k.

And only in 10% of cases only one type of fraud was committed. In 90% of cases, the violators committed several types of fraud. That is if the manager was caught in corruption, with a 30% probability he committed another type of fraud. 

So what are the main reasons for top-level fraud? Can everything be explained by the banal triangle of fraud can-want-need?

  • life beyond means
  • financial distress
  • an unusually close relationship with supplier or customer
  • overcontrol or reluctance to share responsibilities 
  • recent divorce or family issues
  • the general attitude that includes shrewd or dishonest conduct

Financial difficulties and family problems as reasons for fraud are more popular among women, and close relationships with the supplier are more popular among men.

Human nature is such that people lie when it is profitable for them and there is such an opportunity. The risk of being caught is not reflected in the desire for dishonest behavior if it’s worth it.

How were frauds detected most often in 2019?

  • Message to the hotline — 43%
  • Internal Audit - 15%
  • Management control - 12%
  • Randomly - 5%
  • External Audit - 4%
  • Recalculation of accounting records - 4%
  • Other - 17%

Well, it remains to start a hotline and create an internal audit service and you can sleep well? Almost.

Setting up internal controls significantly reduces the amount of losses and the duration of fraudulent activity. But if you build an ethical atmosphere in the team, in which each employee will have a moral argument to work for the company's benefit, rather than to parasitize it, then the probability of fraud can be reduced to minimum values.

Understanding and observing the motives of fraud among top management will help prevent damage to the company. After all, it is much cheaper to be attentive to your employees than to bear losses, which are compensated on average only by 15%.

Image: Report to the nations for 2020, page 10.

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