Executives often receive lucrative compensation packages. For some, it’s not enough and they engage in illegal activities to line their own pockets. The Association of Certified Fraud Examiners (ACFE) has found that owners and executives commit 20% of occupational fraud. However, they’re responsible for the largest median loss of $600,000. (In comparison, rank-and-file employees who steal are responsible for a median loss of just $60,000.)
Most organizations can’t afford such losses. Then there’s the risk of bad publicity, potential for lawsuits, and demoralized employees and other stakeholders. You need to take aggressive measures to avoid executive fraud from fleecing your company. In the event you discover fraud has already occurred, act quickly to contain it and hold the perpetrator responsible.
Some businesses falsely assume their executives aren’t motivated to commit fraud because they’re generously compensated. Executives are also normally “known quantities” — trusted individuals who’ve been with their organizations for a long time and are often leaders in their communities. Like other employees, executives may feel internal and external pressures. They may also work in environments that makes stealing relatively easy.
The fraud triangle is a paradigm forensic accountants use to explain the incidence of occupational fraud. It includes three elements:
- Pressure. Executives often face lifestyle pressures — for example, they could feel they need to live in an exclusive neighborhood, drive an expensive car, or take exotic vacations to prove they’ve “made it.” These pressures can cause individuals to overextend their finances until they can no longer keep up with their bills. Executives may also feel pressure on the job to pump up sales numbers or falsify financial statements to make their companies (and their own performance) look better.
- Opportunity. As high-ranking employees, these individuals generally have the power and authority to steal or cheat — particularly if their company doesn’t enforce adequate internal controls.
- Rationalization. Executives who steal may think “everybody does it” or they “deserve” more than they legitimately earn. Substance abuse or gambling issues may also interfere with their judgment.
Internal controls are critical to preventing and detecting all occupational fraud. To help ensure executives aren’t engaging in criminal activity, you may need to take extra steps. However, because upper management often has the authority to override internal controls, you must clearly communicate when overrides are permissible or not. If an executive believes an override is necessary, that person may be required to get a second executive’s opinion or to document the incident.
Here are some other suggestions:
Mandate fraud training for everyone. Many businesses allow executives to opt out of fraud training provided to other employees. This decision inadvertently sends the wrong message to executives that they don’t present a fraud risk.
Empower your audit team. Whether your company has an internal audit team, outside auditors — or a combination of both — give them unfettered access to your company’s records. If the audit team encounters a roadblock or is denied access to any information, they need to know whom to contact (for example, your company’s owner or board) and how to proceed.
Provide a third-party hotline. An anonymous hotline enables rank-and-file workers to share concerns and suspicions about an executive possibly committing fraud without risking their jobs. Ensure the integrity of your hotline by providing only those who need to know, such as fraud investigators, access to the tips.
Investigate every allegation. Sometimes tips involving an executive are ignored or result in less rigorous investigations to avoid upsetting the high-ranking employee. To ensure a fair and unbiased investigation, consider engaging an external fraud expert to look into every legitimate-seeming allegation.
Pursue legal remedies. The ACFE reports that executives generally are less likely to receive punishment for fraud offenses than lower-level managers and average employees. Organizations may avoid civil litigation or criminal prosecution for fear of bad publicity. This allows executives to commit fraud without ramifications may increase the likelihood that another employee or executive will commit fraud in the future.
Most executives are loyal and committed to the success of their organizations and would never commit fraud. Unfortunately, the small percentage of executives who do engage in criminal acts can cause significant damage. Review your antifraud policies and procedures and make sure they address executive fraud risk. Contact us for help.
HoganTaylor Technology Services
HoganTaylor Technology Services encompasses all of the Firm’s information technology service offerings including managed services, outsourced CIO and technology solutions, cybersecurity services, and IT strategy and assessments. If your organization needs assistance in evaluating its technology strategies and goals, please reach out to Cody Griffin, Lead Technology Partner.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.