Good morning, GCers. Some friends of ours at the University of Illinois at Urbana-Champaign and Queens University in Kingston, Ontario are conducting research on group fraud, and we’re hoping you can do them a solid and help them with their project.
While I’m sure they wouldn’t pass up an opportunity to hear about a juicy group fraud that maybe your former or current colleagues were involved in, or maybe even you were involved in, that’s not the goal of their research.
What they want to know is if you ever felt pressured to participate in a fraud with others in your organization and you refused. Why did you refuse to participate in it, and how were you able to avoid it? What person within your organization was the leader, or “recruiter,” of the fraudulent activity? What anti-fraud controls were in place at that time? What was the culture like in your organization?
Your participation in a survey they are conducting would be kept confidential.
What is group fraud?
Group fraud, which the researchers define as “an intentional illegal act (fraud) committed with at least one other person within an organization,” is a less understood phenomenon than solo fraud, said Pamela Murphy, PhD, CPA, CFE, associate professor and E. Marie Shantz Fellow in Accounting, Stephen J.R. Smith School of Business, Queens University.
“Statistics have shown that within an organization, group fraud occurs more frequently than solo fraud,” she said. “And of course it costs so much more because when people work together, they can override controls more easily, and the fraud is so much bigger.”
A 2016 KPMG report found that fraud is almost twice as likely to occur in groups as in solitude, partly because fraudsters need to collude to circumvent anti-fraud controls, such as internal audit, suspicious managers and co-workers, and anti-fraud processes. Colluders also tend to do more damage than individual fraudsters; 34% of those who participated in a group fraud cost their company $1 million or more, whereas only 16% of solo frauds exceeded that amount, according to the KPMG report.
In addition, KPMG revealed that men tend to collude more than women do—by a five-to-one margin—but the proportion of women involved in a group fraud has increased since 2010. Male fraudsters tend to be more senior than women in the organization.
Some of the more common types of fraud that could be perpetrated as a group include:
- Misappropriation of assets (theft, disbursement schemes, inventory schemes)
- Corruption (bribery, using one’s organizational influence for personal gain)
- Fraudulent statements (falsified financial statements, falsified tax returns)
“Fraud hits you in the head like a feather”
But for those of you who trusted your gut instinct and declined to be a part of a group fraud, the researchers want to find out why you resisted that temptation. They have already examined those who didn’t heed their gut instinct.
“There’s a saying in business that, ‘Business decisions should be rational. Don’t let your emotions get involved.’ But this is a case when you should let your emotions get involved because your emotions are telling you about the warning signals,” Murphy said.
One husband and wife team who were convicted of fraud ignored the warning signals until it was too late, according to Murphy. Several years ago, the husband had gotten the job of his dreams working for a large, privately-held company in the U.S., he told Murphy during an interview. He was part of the C-suite, basically heading up all of the administrative functions within the organization, such as accounting and human resources, and he was tasked with hiring several midlevel managers for the company. He had to hire them quickly, and he wanted to impress his boss.
It just so happened that his wife was a headhunter, so he hired her, even though there was an obvious conflict of interest.
“Part of him knew this because he told his wife to bill the company using her maiden name so they wouldn’t attach the names to each other. But at the start, she was charging a reasonable amount. There was no fraud. She helped him hire quickly, so he looked great to his boss, and things were going beautifully,” Murphy said.
The wife ended up dropping all of her other clients and worked solely for her husband’s company. Because of this, he told her to raise her rates a little bit, so she started charging the company more, unbeknownst to management. Eventually they realized that “we might actually be committing fraud here,” Murphy said.
“They were quite worried about what to do about it, so he decided to leave his job, which he did,” she said. “They thought this was all behind them. But after he left, the company started putting in a new accounts payable system, came across these invoices that appeared to be too high, and started an investigation. When they realized what happened, the company pressed criminal charges. The husband and wife were both found guilty.”
The researchers want to understand how the recruitment process works. Who tried to recruit you to participate in a group fraud? Did that person fit the typical profile of a recruiter, which, according to Murphy, is a high-ranking, male C-suite executive, like a CEO, who is both very charismatic and manipulative, and cajoles people into doing things they know they shouldn’t be doing?
Kinda like some Big 4 partners, amirite?
She added: “When you take that to more of an extreme, those are definitely the recruiters.”
In addition, the researchers want to know what management controls were in place—and what controls weren’t in place—to deter a group fraud. Weak internal controls were a contributing factor in allowing 61% of frauds to occur and go undetected, according to KPMG’s report. And 27% of people who committed fraud did so because an opportunity presented itself due to weak controls or a lack thereof, up from 18% in 2013.
The researchers also want to know a little bit about the organization’s culture. During Murphy’s interview with the husband who was convicted of fraud, she asked him about the company’s culture at the time he was committing fraud with his wife. He said the culture was to “move very, very fast,” and that fast-paced environment drove him to do something illegal. In addition, he told Murphy that some of his C-suite colleagues were also doing suspicious things, such as bringing in a shredder and shredding a whole bunch of documents outside of the company’s regular shredding time.
As the interview with the husband concluded, Murphy said he sort of slumped down in his chair and said, “Fraud hits you in the head like a feather.”
How you can participate
If you’re interested in sharing your experience of refusing to participate in a group fraud with the researchers, you have two ways of doing so:
1. Interview: Fill out this form and the researchers will contact you for an interview. Use this form also if you’re not sure if you qualify for their study. Your responses will be kept confidential.
2. Answer survey questions: The survey will take about 30 minutes to complete. Your answers will be kept confidential. And for every 10 people who complete the survey, the researchers will draw a name, and if your name is chosen, they will make a $100 contribution to your favorite charity.
Thanks for helping them out, and please share the survey with anyone you know who may have been approached to participate in a fraud.