HOURLY EMPLOYEES ARE MORE LIKELY TO COMMIT FRAUD

Hourly Employees are more likely to Commit Fraud Verus Salary Employees

Hourly Employees are more likely to Commit Fraud Verus Salary Employees

Introduction

The researchers found the most common reason employees committed fraud had little to do with opportunity, but more with motivation the more dissatisfied the employee, the more likely he or she was to engage in criminal behavior. One criminologist described the phenomenon as “wages in kind.” (Hesch 2009) All of us have a sense of our own worth; if we believe we are not being fairly treated or adequately compensated, statistically we are at much higher risk of trying to balance the scales.

A second theory about why employees commit fraud is related to financial pressures. In the late 1940s, criminologist Donald R. Cressey interviewed nearly 200 incarcerated embezzlers, including convicted executives. He found the great majority committed fraud to meet their financial obligations. Cressey observed that two other factors had to be present for employees to commit fraud. They must perceive an opportunity to commit and conceal their crimes, and be able to rationalize their offenses as something other than criminal activity. (Kohn 2004)

Discussion

An investor spent his life savings gaining control of a 100-year-old public company that manufactured vacuum cleaners. After installing himself as CEO, the investor introduced a completely new product line. But the new vacuums were vastly inferior to the old ones, and consumers returned them to the factory in droves. Rather than credit the inventory account for returns, the CEO simply rented off-site space to store the junk vacuums. When the scheme got too big to control, the executive saw the futility of continuing the scheme, so he confessed to the authorities. Inventory was overstated by $40 million. The independent auditors were sued for malpractice, and the business folded. The CEO went to jail. Investors lost everything; the CEO's motivation? He had hocked everything he owned to acquire the company. The auditors hadn't and couldn't have known that. (Hesch 2009)

According to legend, a loyal bookkeeper for a company was denied a $100 monthly raise. The bookkeeper was incensed, so he methodically stole for the next 20 years, until he retired. His replacement discovered an amazing fact: The retired bookkeeper had pilfered exactly $100 a month the precise sum of the raise he had requested. (Kohn 2004)

Opportunity

The lesson in these stories is that fraud does not occur in isolation. All crime is a combination of motive and opportunity. The opportunity to commit fraud is typically addressed through internal controls if the proper checks and balances exist, it is more difficult (though still not impossible) to defraud an organization. (Hesch 2009)

To deter opportunity, divide responsibility. If one person controls both the books and the assets, the ability to commit fraud is limited only by that person's imagination. But if another employee shares a task, it is less likely a perpetrator can succeed. Furthermore, if an employee needs help to defraud an organization, opportunity is greatly ...