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A piece of BBC news reported that a teacher from Flintshire, England committed a fraud involving an amount of over 8,000 and was granted a community sentence (BBC news, 2011). The teacher, Susan England, is the treasurer of an after-school club. She recently lost her husband and was in great debt as a result of depression and comfort shopping. To repay the debt, she misappropriated funds from the club by forging the signature of a co-signatory on cheques. The teacher accepted fraud charges against her and was sentenced a 12-month community order (ibid.).Each year, hundreds of similar fraud events hit headlines of various newspapers and fraud is recognized as a serious issue by many scholars. Fraud has a negative impact on both micro and macro sides. To individual companies, fraud consumes vital resources thus weakens operation efficiency, productivity and innovation (Glover and Aono, 1995). Carland et al. (2001) demonstrate that fraud is the major cause of small business failures. Fraud also brings about huge costs to a nation as a whole. Year on year, governments have to allocate huge amounts of funds to bail out business failures caused by fraud (Glover and Aono, 1995). Moreover, fraud can harm social morality since perpetual fraud cases tend to cultivate the attitude If others can do it, so can I, triggering even more fraud events (ibid.). It was estimated by ACFE that companies worldwide suffered a $2.9 trillion fraud loss in 2010, equivalent to 5% of corporate revenues (Dorminey et al., 2010). Among the various types of fraud, employee fraud, the one covered by the news story above, is the most common and contribute to the majority of fraud losses (Wolfe and Hermanson, 2004). This essay is dedicated to identify the innate character of fraud and critically reflect on how the risk of fraud can be reduced. The paper will firstly explain what employee fraud is and demonstrate the issues significance. It then will describe essential conditions that breed employee fraud, mainly focusing on three frameworks. The essay will next propose and assess measures to minimize the possibility of employee fraud within an organization. At the end, the article will provide a conclusion, summarizing main points put forward by the text.

Fraud is defined as the use of deception with the intention of obtaining an advantage, avoiding an obligation or causing loss to another party by the Governmental Internal Audit Manual (HM Treasury, 1997). It is acknowledged by Baloyi (2005) that internal employee fraud poses the most serious threats to corporate assets and employee fraud is defined by Porter (2003) as the use of ones occupation for personal enrichment through the deliberate misuse of the employing organizations
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resources or assets. It usually refers to manipulation of an organizations money or property without corresponding authority (Oliphant and Oliphant, 2001). Lipman and McGraw (1988) recognize the seriousness of employee fraud and describe employee theft as a $40 billion industry. Over 30 million pounds are lost each day because of employee fraud within UK firms (Thompson, 2002) and this figure is around $600 for US businesses in 2001 alone (Porter, 2003). There seems little doubt that employee fraud is a severe headache to most organizations and management has endeavored to find effective ways to contain fraud. However, it can be difficult to formulate adequate strategies to counter employee fraud without an understanding of why and how it happens. The essay will next outline forces that drive an employee to commit fraud, citing three major views that complement each other

A generally accepted framework that analyzes fraud is the fraud triangle initially raised by Sutherland and his student Cressey in the 1940s (Dorminey et al.. 2010). The triangle decomposes fraud risk into three elements, incentive or pressure, opportunity and attitude or rationalization (Jans et al., 2009). The triangle is presented below.

Incentive or pressure is the most fundamental factor that drives a person towards fraud. One most
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common source of pressure is financial distress (Lewicki et al., 2010), as the one in the news story above. Under such distress, one often cannot find alternative ways to solve his or her financial problem other than borrowing from the company (ibid.). Opportunity for fraud exists when employees have access to relevant assets and can conceal the fact of embezzling them. Even when an employee has both an incentive and opportunity to commit fraud, he or she wont do so unless his or her attitude supports such a behavior. The employees attitude or rationalization towards fraud is the last component that completes the fraud triangle (Ramos, 2003). Under this framework, it is the combined effect of the three angles that triggers fraud and if any one of the conditions is missing, fraud wont take place (ibid.). This framework usually serves as a stepping stone in fraud analysis for scholars and helps them generate more sophisticated models to interpret fraud (Turner et al., 2003).

Since the 1950s, many scholars have realized that it is not enough to simply rely on the triangle model to explain fraud and have been actively developing theories that supplement the basic model (Dorminey et al., 2010). In their article The fraud diamond, Wolfe and Hermanson (2004) recognize the relevance of ones capability in fraud commitment and add this fourth element to the traditional triangle, generating a fraud diamond to illustrate the occurrence of fraud. They argue that apart from incentive, opportunity and rationalization, one must also have the ability to recognize fraud opportunities to execute theft. While most works treat innate mentality of employees committing fraud largely the same, Carland et al. (2001) distinguish the thought path between honest and dishonest employees. They state that in presence of incentive and opportunity, an honest employee needs a conscious rationalization to persuade himself to embezzlement while a dishonest employee has an unconscious rationalization towards fraud and actively seeks opportunities to steal. The indication of distinction between honest and dishonest employees may signal new approaches to fighting employee fraud.

Summarizing various works regarding fraud, it can be concluded that both objective and subjective factors contribute to employee fraud. From the objective perspective, there is usually a weakness in an organizations AIS thus employees may take advantage of the systems deficiencies to embezzle
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assets. In fact, improper AIS usually plays the most important role in employee fraud commitment. A survey carried out by Singleton et al. (2003) revealed that insufficient internal control ranked highest among various reasons of employee fraud. Accordingly, strengthening internal control might be necessary to lower fraud opportunities to minimal. This point is supported by KPMG as it determines adequate internal control as the most effective method to reduce fraud (ibid.). However, more advanced control system often implies greater investment in AIS in terms of both money and efforts. Management has to weigh the cost of implementing a sophisticated system and that of employee fraud. Unfortunately, cost of preventing fraud through better internal control is often so high that many employers just have to let fraud go (Chen and Lee, 1992). This may partly explain why most managers understand fraud well but still cannot counter it (Oliphant and Oliphant, 2001).

As to subjective elements of employee fraud, they may include an employees incentive, attitude, perception of fraud detection etc. These aspects are generally related to an employees psychology and can be rather difficult to control. Many professionals note that a healthy culture is important to foster honest employee behaviors. Lipman and McGraw (1988) claim that an atmosphere that gets everyone involved and stimulates each employees contribution discourages employee theft. Carland et al. (2001) add that an ethical climate is vital to promote honesty and counter fraud within a firm. But as has been stated above, a persons behavioral aspects such as intentions and actions are difficult to predict and manage, hence even a sound corporate culture cannot ensure that each employee behaves honestly. Moreover, the effectiveness of an anti-fraud culture is doubted by Singleton et al. (2003) as their research results suggest that some corporations with formal ethic policies experience even more fraud cases than those without such policies.

In face with an imperfect control system and an anti-fraud culture that does not always work, a company might still lower the risk of fraud by controlling the quality of employees to enter the firm. Namely, a company can adopt a preventative approach towards fraud by hiring honest instead of dishonest employees. This can be realized through instruments such as pre-employment interviews, honesty tests and background survey (Albrecht et al., 1982). Once again, this approach is not a 100%
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insurance against fraud. Applicants may grasp techniques enabling them to successfully pass honesty tests even if they are not honest. Moreover, there is no guarantee that honest employees will always behave honestly. But overall, these techniques help a firm filter a large number of improper candidates (ibid.).

To conclude, the essay discussed the issue of employee fraud covered by a BBC news story. It interpreted employee fraud as unauthorized use of an organizations resources and recognized the serious consequences of employee fraud. It then introduced several fraud theories to explain why employee fraud might happen. Under the traditional fraud triangle, incentive or pressure, opportunity and attitude or rationalization together account for the occurrence of employee fraud. A more recent fraud diamond framework introduced a fourth element, capability into essential conditions contributing to employee fraud. Carland et al. (2001) go beyond the traditional models and point out that distinctions exist between honest and dishonest employees regarding fraud mentality. The paper next proposed strengthening internal control, creating a favorable corporate culture and hiring honest employees as potentially effective means to counter employee fraud. However, evaluation of these methods indicates that there is no pure perfect approach to fighting employee fraud and management may need to consistently improve its existing measures to control fraud.

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References

Albrecht, W.S., Romney, M.B., Cherrington, C.J., Payne, I.R. and Roe, A.V. (1982) How to Detect and Prevent Business Fraud. US: Prentice Hall.

Baloyi, N.T. (2005) Misuse Intrusion Architecture: Prevent, Detect, Monitor and Recover Employee Fraud. The Proceedings of the Information Security South Africa 2005 New knowledge today conference, Sandtorn, South Africa. [Online] Available from <http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.97.9224&rep=rep1&type =pdf > [24 April, 2011]

BBC news (2011) Flintshire teacher Susan Englands 8,000 fraud. [Online] Available from <http://www.bbc.co.uk/news/uk-wales-13069837> [15 April, 2011]

Carland, J.W., Carland, J.C. and Carland, J.W. (2001) Fraud: A concomitant Cause of Small Business Failure. The Entrepreneurial Executive, Vol. 6, 2001.

Chen, K.T. and Lee, R.M. (1992) Schematic Evaluation of Internal Accounting Control Systems. EURIDIS Research Monograph, No. RM-1992-08-01. Rotterdam: Erasmus University.

Dorminey, J.K., Fleming, A.S., Kranacher, M.R. and Riley, R.A. (2010) Beyond the Fraud Triangle. The CPA Journal, July, 2010. [Online] Available from: <http://findarticles.com/p/articles/mi_qa5346/is_201007/ai_n54718070/> [25 April, 2011]

Glover, H.D. and Aono, J.Y. (1995) Changing the model for prevention and detection of fraud. Managerial Auditing Journal, Vol.10, No.5, pp.3-9.
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HM Treasury (1997) Managing The Risk of FraudA Guide for Managers. [Online] Available from: <http://archive.treasury.gov.uk> [23 April, 2011]

Jans, M., Lybaert, N. and Vanhoof, K. (2009) Internal fraud risk reduction: Results of a data mining case study. International Journal of Accounting Information systems, Vol. 11, 2010, pp.17-41.

Lewicki, R.J., Bies, R.J. and Sheppard, B.H. (1997) A Social Influence Model of Employee Theft: Beyond the Fraud Triangle. Research on Negotiation in Organizations, Vol. 6, pp. 29-51. [Online] Available from:

<http://psycnet.apa.org/psycinfo/1998-07309-002> [23 April, 2011]

Lipman, M. and McGraw, W.R. (1988) Employee Theft: A $40 Billion Industry. Annals of the American Academy of Political and Social Science, Vol.498, July, 1988. [Online] Available from <http://www.jstor.org/pss/1045380> [23 April, 2011]

Oliphant, B.J. and Oliphant, G.C. (2001) Using a Behavior-based Method to Identify and Reduce Employee Theft. International Journal of Retail & Distribution Management, Vol.29, No. 10.pp.442-451. [Online] Available from [24

<http://www.emeraldinsight.com/journals.htm?articleid=857338&show=html> April, 2011]

Porter, D. (2003) Insider Fraud: Spotting the Wolf in Sheeps Clothing. Computer Fraud & Security, April, 2003, pp. 12-15.

Ramos, M. (2003) Auditors Responsibility for Fraud Detection. Journal of Accountancy, January, 2003.

Singleton, T., King, B., Messina, F.M. and Turpen, R.A. (2003) Pro-Ethics Activities: Do They Really Reduce Fraud? The Journal of Corporate Accounting & Finance, Vol.
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14,

No.

16,

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85-94.

[Online]

Available

from:

<http://onlinelibrary.wiley.com/doi/10.1002/jcaf.10202/abstract> [25 April, 2011]

Thompson, M. (2002) Protecting from Within. Computer Fraud& Security, October, 2002, pp.8-9.

Turner, J.L., Mock, T.J. and Srivastava, R.P. (2003) An Analysis of the Fraud Triangle. [Online] Available from

<http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.101.4380&rep=rep1&type =pdf> [25 April, 2011]

Wolfe, D.T. and Hermanson D.R. (2004) The Fraud Diamond: Considering the Four Elements of Fraud. The CPA Journal, December 2004.

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AppendixNews report

13 April 2011 Last updated at 16:45 GMT

Flintshire teacher Susan England's 8,000 fraud

Susan England was said to have been previously of 'exemplary character' A respected teacher, who admitted a 8,000 fraud from an after-school club, has been given a community sentence. Deputy head Susan England, 58, admitted the charges involving the club at Ysgol Bro Carmel near Holywell, where she taught for 35 years. England was said to have been in debt and had suffered from depression following the death of her husband. She was given a 12-month community order at Mold Crown Court and will be tagged for five months. Judge Dafydd Hughes said that it was "a series of very serious frauds over a significant period of time". He said that because of the financial difficulties England got into, she helped herself to substantial sums, in excess of 8,000. "You were put in a position of trust and you betrayed that trust," he told England, who was treasurer of the after-school club in which parents paid fees for their children to be cared for out of school hours. "You seriously let yourself down. You were a person of exemplary character before these offences were committed." She had also betrayed the trust of another teacher, a co-signatory on the cheques she
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wrote, the court was told. England, of Prestatyn, Denbighshire, was said to be 15,000 in debt because of depression and "comfort shopping" after the death of her husband. Patrick Williamson, defending, said a school inspection report had once singled England out as a role model for others in the locality. But there had been a substantial fall from grace and she now rarely went out in case she met parents or others at the school, the court heard. Judge Hughes said he had read references including one from a former head teacher at the school who spoke of her "in glowing terms". "That is the tragedy of this case - your fall from grace has been substantial," he told her. England admitted seven fraud charges and asked for 33 similar offences to be taken into consideration. The judge gave her a 12-month community order and tagged her for five months to ensure that she remained indoors between 1900 and 0700. There will also be a financial investigation under The Proceeds of Crime Act to see how much of the money, if any, can be recovered.

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